What is "Beta"?How is it calculated in the case of stocks and shares?

Answer 1

A way to evaluate an investment's volatility is to look at its beta, which compares an individual investment's volatility to that of the market. A stock or mutual fund with a beta of 1.0 would have exactly as much market risk as its benchmark--for example, the S&P 500 stock index. A stock or mutual fund with a beta of 1.5 would involve 50 percent more market risk than the benchmark; if the benchmark went up, the individual security would be expected to go 50 percent higher. If the benchmark's return dropped, the security's return should be 50 percent lower. Conversely, a stock or fund with a beta of less than 1.0 would involve less market-related volatility than the overall market. If the S&P rose by 50 percent, an investment with a beta of .5 should benefit by only 25 percent. If the benchmark fell by 50 percent, the individual security with a .5 beta should experience only a 25 percent drop.

Answer 2

I will give you the short answer and then the more technical answer.

The short answer is that beta is linear rate at which a given stock's percentage change changes when the market changes a given percentage.

It is estimated by taking the daily percentage change of the security to be estimated against the daily percentage change of an index such as the S&P 500 or the Russell 4000 or the Dow and doing a linear regression on it.

Slightly more technically it is the linear estimate of the elasticity of a security with relationship to the market.

All that said, you usually can ignore it. Since it is formed by a partial derivative, its impact is very light. Other factors are far more important. Additionally, non-dividend paying stocks must be Cauchy distributed. This violates strongly the assumptions underlying ordinary least squares. Other forms of median based regression could be used to make an estimate, but there are other issues too.

Beta seems to spontaneously change. Beta appears to be a measure of scarcity. High beta stocks seem to have problems finding supply to cover the market. So high beta stocks swing wildly because the market maker is not intervening in the market. The market maker does not want to bear the risk and so lets the market cover what would normally be the market maker's risk, hence the rise of day traders in those markets. This makes market failure easier and therefore more risky over time. A sudden drop in beta would imply a large influx of supply, which would tend to drive down the price.

Answer 3

Beta is a quantitative measure of the volatility of a given stock, mutual fund, or portfolio, relative to the overall market, usually the S&P 500. Specifically, the performance the stock, fund or portfolio has experienced in the last 5 years as the S&P moved 1% up or down. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.

Answer 4

beta is volatility in regards to the price of a stock in relation to the market as whole

a beta of 1 means that stock moves up and down similarly with the market as whole...eg...ibm, ge, mo...the more stable companies

a beta of 2 means you move twice as much as the market as a whole...if the market is up 5%, this stock is up 10%...if the market is down 8%, the stock is down 16%

beta measures the movement of a given stock against the movement of the market

risky stocks have a very high beta...safe stocks a low beta