What is Beta? Definition, Importance, Example

Beta is a measure of the systematic risk involved with a stock or other investment. It can tell investors how much a stock tends to move with overall market forces, and can be a valuable tool in managing volatility in a portfolio. In this article, we’ll take a look at what beta is, how it can be useful, and some examples of beta in real-world stocks.

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An infographic showing the formula used to calculate a stock's beta. — Image source: The Motley Fool

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Correlation Coefficient

A correlation coefficient is a number that is used to describe the strength of a relationship between two variables. These numbers range from -1 to +1, with zero describing no correlation at all.

A beta coefficient of 1 means that a stock tends to move with the overall market.
A beta coefficient of less than 1 means that a stock tends to be less volatile than the overall market. Utility and real estate stocks are two examples of industries that typically have low betas.
A beta coefficient of more than 1 means that a stock tends to be more volatile than the overall market. High betas are quite common in the technology sector and among earlier-stage growth stocks.
A negative beta coefficient indicates a stock’s movement tends to move in the opposite direction of the S&P 500. This is most common with inverse ETFs or investments that are specifically designed to move in the opposite direction of the overall market.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Matt Frankel has positions in Realty Income. The Motley Fool has positions in and recommends Apple, Realty Income, and Tesla. The Motley Fool has a disclosure policy.