Beta is the statistical index of the volatility or sensitivity of a portfolio or securityâs price changes to changes in the value of the overall market or assets as a whole. Beta is also known as, âbeta coefficientâ.
Beta is generally used in the Capital Asset Pricing Model or CAPM, which is a model used to calculate an assetâs expected rate of return based on expected market returns and its beta coefficient.
Beta is determined using the regression analysis, where beta is assumed as the trend of the securityâs expected returns to react to changes in the market. A beta of 1 shows that, the security or assetâs price will move in the marketâs direction. A beta below 1 indicates that the securityâs volatility is less than the market. If a securityâs beta is higher than 1, indicates that the securityâs value will be very sensitive than the market.
For example, if a stock has a beta of 1.3, theoretically this indicates the stock is 30% more volatile than the market.
Most utilities stocks have betas below 1. In contrast, high-tech firms, stocks traded in NASDAQ, possess a beta more than 1, which gives the prospects of higher return but with greater risks.