Stocks with a beta of 1.25 can have higher returns than the market average.
A stock’s beta is an assessment of a stock’s tendency to change in price, or its volatility, as well as its potential returns compared to the general market. It is expressed as a ratio, where a score of one represents performance comparable to a generic market, and above- or below-market returns can be scored higher or lower than one. Publications and trade references may provide stock beta with other information for investors doing research. It is also possible to calculate this number independently, for those familiar with the regression analysis techniques used to find beta ratios.
A stock’s beta is an assessment of a stock’s tendency to change in price, or its volatility.
Volatility and returns greater than those seen in the open market result in a stock beta greater than one. Stocks with a beta of 1.25, for example, are more subject to fluctuations than the market used as a reference. It also means that these stocks can have higher returns than the market average. If a stock has a high beta, it also means it is a riskier investment. People who bet on the wrong side of volatility can suffer losses.
When the value falls between zero and one, the stock is less excitable than the average market. These stocks can be reliable investments because they are unlikely to generate losses, but they will not create significant gains either. Low stock beta scores are common for investments such as utilities, which tend to lag with stable prices. They are less reactive to market swings, which can protect investors, but also limit access to windfall gains caused by sudden fluctuations in value.
A zero score is possible for stocks that don’t seem to move with the market. If the stock’s beta is less than zero, it means that it tends to move in opposition to the market. When market performance rises, returns remain low, and when market values fall, the stock can generate profits greater than those seen on the open market. Negative stock beta scores are uncommon but occur with some stocks and other bonds, which can be used in a portfolio as a hedge against dramatic financial events. A sudden drop in the value of a portfolio as a whole can be offset by negative beta stock.
Returns measurements involve collecting substantial data over time to see how stocks perform, compared to a market such as a stock index to measure behavior. The more data, the more useful the end result will be. Limited samples can create a skewed beta score as stocks can experience periods of volatility and exceptionally high or low returns offset by stability at other times.