measure of systematic or undiversifiable risk of a stock. A beta coefficient of more than 1 means that the company’s stock price has shown more volatility than the market index (e.g., Standard & Poor’s 500) to which it is being related; usually, that indicates it is a risky security. If the beta is less than 1, it is less volatile than the market average. If it equals 1, its risk is the same as the market index. High variability in stock price may indicate greater business risk, instability in operations, and low quality of earnings.
measure of price volatility of mutual funds and financial instruments. Beta is usually expressed as a covariance; in mutual funds, it measures how responsive a fund is to the market as a whole. A fund with a 1.10 beta is expected to perform 10% better than the Standard & Poor’s 500 Index in rising markets and 10% worse in falling markets.
coefficient is the covariance of a stock or portfolio in relation to the rest of the stock market. The Standard & Poor’s 500 Stock Index has a beta coefficient of 1. Any stock or portfolio with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. A conservative investor whose main concern is preservation of capital should focus on stocks with low betas, whereas one willing to take high risks in an effort to earn high rewards should look for high-beta stocks.