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.)
Low-Beta-Stocks (less than 1)
(often defensive sectors like pharma and consumer-staples)
|Fresenius Medical Care||0.61|
|Procter & Gamble||0.44|
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)