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Beta definition
Beta is a measure of how sensitive an investment is to movements in the wider market. It shows how far a stock, fund, or portfolio tends to move when its benchmark index moves.
Beta is read against a value of 1.0. A beta of 1.0 means the investment tends to move in step with the market. A beta above 1.0 means it tends to move more than the market, and a beta below 1.0 means it tends to move less. The figure captures systematic risk, the market-wide risk that diversification cannot remove.
Beta is often paired with alpha, but the two answer different questions. Beta measures exposure to the market's movement, while alpha measures the return earned above or below a benchmark. A high-beta stock amplifies market swings without telling you whether it beats the market.
Beta Example
A stock has a beta of 1.5 measured against the S&P 500.
If the S&P 500 rises by 2%, the stock tends to rise by about 3%:
2% √ó 1.5 = 3%
If the S&P 500 falls by 2%, the stock tends to fall by about 3%, because its higher beta makes it move more than the market.
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