Springy Answers

Beta is a risk measure comparing the volatility of a stock's price movement to the general market. It provides a good indicator of a stock's inherent risk or sensitivity to general market fluctuations.

• Derived from a formula that measures the volatility of a stock compared to the volatility of the market in general, as measured by a market index such as the S&P 500. Beta's companion measure of volatility is alpha.
• The beta for a stock may vary in an up-versus down-market.
• Monthly data is preferred.

Signals: High beta stocks react strongly to variations in the market; low beta stocks are less affected by market variations.

• If beta is 1, than an issue has the same volatility as the general market; it is either growing or declining at the same rate. if the market is in an up trend, then the security will gain 25% more than the general market.
• If beta is > 1, than the issue is more volatile. At 1.25 it will probably move 25% more than the market.
• If beta is < 1, than an issue is less volatile. At 0.5 it probably will move only 50% or half of the market; if the market is in a downtrend, it will only lose 50% of what the general market loses.
• If beta is < 0, than the stock is moving in a reverse pattern to the index; when the index move up the stock declines and vise versa.

Calculating Beta

To calculate the 200-day beta for a stock, in comparion with the S&P 500:

• Compute the 200-day percentage changes in the S&P and the 200 one-day percentagae changes in the stock
• These calculations produce 200 ordered pairs that are then charted as a scatter graph; the slope of the least-squares-fit line is the value of the beta; alpha is the y-intercept of the least-squares-fit line.

Source: Chartfilter

Additional Recommendations:

• Sources for Locating Current and Historical Betas