Fundamental Analysis Techniques
Beta
HOW MUCH volatility can you expect from a given stock? That's well worth knowing if you want to avoid being shocked into panic selling after buying it. Some stocks trend upward with all the consistency of a firefly. Others are much more steady. Beta is what academics call the calculation used to quantify that volatility.
The beta figure compares the stock's volatility to that of the S&P 500 index using the returns over the past five years. If a stock has a beta of 1, for instance, it means that over the past 60 months its price has gained 10% every time the S&P 500 has moved up 10%. It has also declined 10% on average when the S&P declines the same amount. In other words, the price tends to move in synch with the S&P, and it is considered a relatively steady stock.
The more risky a stock is, the more its beta moves upward. A figure of 2.5 means a gain or loss of 25% every time the S&P gains or loses just 10%. Likewise, a beta of 0.7 means the stock moves just 7% when the index moves in either direction. A low-beta stock will protect you in a general downturn, a high Beta means the potential for outsize rewards in an upturn.
That's how it is supposed to work, anyway. Unfortunately, past behavior offers no guarantees about the future. If a company's prospects change for better or worse, then its beta is likely change, too. So use the figure as a guide to a stock's tendencies, not as a crystal ball.
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