What is Beta?

Definition Beta: In finance the Greek letter ß describes the systematic risk of an asset compared to the broad market. Beta is an indicator for the volatility of an asset compared to a benchmark.

 

 

Use of Beta

In practice the beta-factor helps the portfolio-manager to allocate risk correctly in a portfolio. The beta-factor is a number with the following meaning:

  • Beta grater than 1: The asset has a higher volatility (price fluctuations) than the market
  • Beta = 1: The asset moves in line with the market
  • Beta less than 1: The asset has a smaller volatility (price fluctuations) than the market
  • Beta negative: The asset moves contrary to the market (if the market moves up, the asset goes down - and vice versa)

 

A portfolio-manager having the order to manage a portfolio as stable as possible, looks after assets with a low beta. A manager with the order for a high risk portfolio goes for assets with a high beta.

 

Example: beta for stocks

In this table you find a comparison of beta-factors from international stocks. (June 2012):

High-Beta-Stocks (greater than 2) 
(ofter zyclical sectors like commodities, finance and cars.)

Stock Beta
Alcoa 2.06
Alcatel-Lucent 2.33
Barclays 2.6
Deutsche Bank                    2.24
Ford 2.32
Arcelor Mittal 2.18


 

Low-Beta-Stocks (less than 1) 
(often defensive sectors like pharma and consumer-staples)

Stock Beta
Abott Laboratories 0.3
Wal Mart 0.31
Kimberley Clark 0.31
Fresenius Medical Care        0.61
Sanofi 0.90
Novartis 0.53
Procter & Gamble 0.44
Colgate Palmolive 0.44
Coca-Cola Company

0.53

 

Chart-Comparison:

A chart-comparison between a high beta stock like Ford and a definsive low beta stock like Coca-Cola shows what beta really means. Just look at the chart and tell me which stock has the higher beta (higher price-fluctuations). The answer is Ford: beta 2.32 vs. Coke beta 0.53)

Coca-Cola Ford 5J