Founded in 1993, How to buy egc coin The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Let us take, for example, an investor who wants to calculate the beta of Nike compared to the S&P 500. Based on recent six-year data, Nike and S&P 500 have a covariance of 18.75, and the variance of Nike is 48.06. A beta value greater than 1.0 signifies that the theoretical volatility of the security’s price exceeds that of the market.

How to Read Stock Betas

Stocks that have a low beta, such as consumer staples, are often used to hedge a portfolio of higher-beta stocks. These low-beta stocks are relatively unaffected by the market’s gyrations or even benefit in times when the economy is poor. This can be achieved by obtaining other stocks that have negative or low betas, or by using derivatives to limit downside losses. Systematic risk, or total market risk, is price volatility that affects is forex broker dowmarkets scam or not stocks across many industries, sectors, and asset classes. Risks that affect the overall market are by their nature difficult to predict and hedge against. The counter point to this rationale is that investors can measure volatility and the S&P 500 with a spreadsheet, but it’s much harder to track real-time trends in emotion.

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At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. A beta of 1.0 implies that the stock is highly correlated with the market. Below is the beta formula, which breaks down how both covariance and variance are computed. For example, as of Oct. 27, 2020, the beta for Microsoft (MSFT), as found on Yahoo! Finance, is 0.92. There is a lot of hope baked into its share price, resulting in wild swings whenever it ADSS forex broker fails/exceeds expectations and a five-year beta of 2.41, as of June 2024. Privacy Policy | No cost, no obligation to buy anything ever.Past performance is no guarantee of future results.

Is Beta a Good Measure of Risk?

While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. MR stands for the market return, which is the return on the benchmark index you are using. RFR stands for the rate of return on a selected Treasury asset that bears no risk.

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Others are willing to take on additional risk for the chance of increased rewards. Every investor needs to have a good understanding of their own risk tolerance, and a knowledge of which investments match their risk preferences. Beta is the volatility of a security or portfolio against its benchmark. It’s a numerical value that signifies how much a stock price jumps around.

1. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
2. A security with a high R-squared value indicates a relevant benchmark.
3. The S&P 500’s 500 constituents will each have different betas based on how they moved in relation to the index over a set timeframe.

We believe everyone should be able to make financial decisions with confidence. Finally, add this number back to the risk-free rate of the selected Treasury security. Under the theory of CAPM, this should give you the asset’s expected return over a given period. A beta value of more than 1.0 implies that the stock will be more volatile than the market, while a beta value of less than 1.0 predicts lower volatility. In a bull market, a beta above 1.0 will likely produce better returns but also come with more risk. Beta measures a stock’s correlation to the market, which can help project its returns.