Beta is a measure of a stock's volatility relative to the overall market (typically the S&P 500). It
mathematically evaluates systemic risk and helps investors gauge how deeply a stock will swing during broad market
crashes or rallies.
| Type |
Risk / Volatility Metric |
| Market Benchmark |
Beta = 1.0 |
| High Volatility |
Beta > 1.2 |
| Primary Use |
Calculating WACC via the CAPM formula |
1.0 Conceptual Breakdown
Beta is derived through regression analysis. A Beta of exactly 1.0 indicates that a stock's price activity
perfectly matches the market. If the S&P 500 swings up 5%, the stock swings up 5%.
- Beta > 1.0: The stock is more volatile than the market. E.g., a Beta of 1.5 means if the
market drops 10%, the stock will theoretically drop 15%. Common in high-growth tech.
- Beta < 1.0: The stock is less volatile than the market. E.g., a Beta of 0.5 means if the
market drops 10%, the stock will only drop 5%. Common in utilities and consumer staples.
- Negative Beta: The stock moves inversely to the market. Extremely rare; usually seen in
Gold mining stocks or inverse ETFs.
2.0 Interpretation & Edge Cases
Beta measures historical volatility, not fundamental business risk. A company rapidly losing money and facing
bankruptcy might have a Beta of 0.8 simply because its stock has plummeted and flatlined, incorrectly implying
it is a "safe" investment.
3.0 Related Pages
Beta is the central multiplier in CAPM to determine expected return.
Beta dictates the cost of equity inside WACC.