Beta

An important measure of a stock's (or a portfolio's) volatility in relation to the Standard & Poor's 500, which by definition has a beta of 1.0. A beta higher than this implies greater volatility than the overall market. Thus, a stock with a beta of 1.5 will move up 15 percent when the market rises 10 percent. In good times, high betas imply high returns, since a beta above 1.0 amplifies the market's movements. In bad times, of course, a beta below 1.0 is desirable, since you wouldn't want your portfolio to magnify downward movements. Ideally, you want a low beta and high returns, which is hard to get. You can lower the overall beta of your portfolio by adding lower beta stocks to the mix, in effect diversifying away some of the volatility.

 

 

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