Beta is a measure of a security’s or portfolio’s volatility relative to the market as a whole. A security or portfolio whose beta is greater than one will experience a greater change in price than overall market prices. While a security or portfolio with a beta of less than one will experience a price change which is less than the price changes realized by the market as a whole.
A stock’s beta is its projected rate of change relative to the market as a whole. If the market was up 10% for the year, a stock with a beta of 1.5 could reasonably
be expected to be up 15%. A stock with a beta greater than 1.0 has a higher level of volatility than the market as a whole and is considered to be more risky than the overall market. A stock with a beta of less than 1.0 is less volatile than prices in the overall market and is considered to be less risky. An example of a low beta stock would be a utility stock. Th e price of utility stocks does not tend to move dramatically. A security’s beta measures its nondiversifiable or systematic risk. For each incremental unit of risk an investor takes on, the investor must be compensated with additional expected returns. If the portfolio’s actual return exceeds its expected return, the portfolio has generated excess returns.
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