Series 66: The Beta Coefficient

The Beta Coefficient

Beta is essentially a measure of correlation, or how two items fluctuate in relation to one another. In this case, we are looking at the correlation between the performance of a single security and the performance of the market as a whole.

Looking at the above formula, suppose a security’s beta = 1.0. The expected return of that security will be identical to the expected return of the market. In other words, the security can be expected to fluctuate by the same percentage the market fluctuates. A beta greater than 1.0 indicates that the price of the security will move more than the market. A beta of less than 1.0 indicates that the price of the security will move less than the market. For example, if the market rose 10%, and a particular stock has a beta of “2.0,” the stock’s price