Explainer: How Beta Relates to Your Investments

Q. What is beta?

A. Beta is a commonly used measure to indicate the risk of a particular investment. It measures volatility relative to the overall market — how much a stock, commodity, portfolio or other asset swings in price as compared to broader market movements. Systematic risk, as it's called, refers to unpredictable risks that affect the whole market and not simply one company, stock or industry. Beta has value as part of a larger discussion about risk, but it is only one, rather narrow, element of the risk equation.

Benefits

Beta can be a useful tool for helping choosing investments that match your personal risk profile. If you're uncomfortable with swings in price and are looking for a smoother ride, stocks with lower beta might be what you're looking for. It is a reasonably clear measure of how much a stock's price has fluctuated relative to the market over time.

Limitations

Beta is a data point based on historical information and as we know, there is no guarantee that a stock will behave the same in the future as it has in the past. In addition, the relationship between beta and returns is fraught, meaning you can't assume that a high-beta stock will provide a higher return potential.

How is beta expressed?

Beta is calculated using a complicated formula based on historical information. The resulting number (either above or below one) articulates an asset's tendency to fluctuate in price relative to the market. While there are various factors involved, here is the gist of how it works:

• Beta of one is the baseline (representing the market), indicating that a stock's price moved in unison with the overall market during the time beta was measured
• Beta below one means lower volatility, indicating a stock's price moved up and down less than the broader market over the measured time period
• Beta above one means higher volatility, indicating a stock's price moved up and down more than the broader market over the time period

For example, if a stock has a beta of two, the company's stock price is expected to be twice as volatile as the broader market. A stock with a beta of 1.2 might be expected to be 20 per cent more volatile than the broader market.

Where do you find beta?

Beta can be found in a detailed quote.

*This article was updated on July 18.