Beta (β) is the Greek letter which symbolizes coefficients. It’s commonly referred to in the investment community as it essentially allows investors to “turn the dial” on how defensive/aggressive their portfolios are.
This isn’t meant to be a technical article so, simply put:
To determine the beta value for a given equity, one would perform a regression analysis of the desired stock (A) along with some sort of market index (B)(usually the S&P 500).
The output would look something like this:
Change in A (ΔA) = Change in B (ΔB) * β
- If β = 1, your chosen stock would move up and down by exactly the same amount that the market moves up down (with all other things being equal).
- If β = 2, your chosen stock would move up and down by twice as much as the general market.
- If β = .5, your chosen stock would move up and down by half as much as the overall market.
- And so on.
If you believed that the market was going to experience a moment of uninterrupted growth, you might want to allocate into equities with higher beta statistics and vice versa. Portfolios with low beta statistics are usually dubbed “defensive” while high beta levels are dubbed “aggressive”.
This method of analysis can also be performed across an entire portfolio of stocks; however, it is important to remember that the individual stocks will also interact with each other. It is also important to remember that this statistic alone only allows you to control for systematic risk (the volatility that you are exposed to just by being in the market) and doesn’t take into account unsystematic risk (the risk inherent to individual firms, sometimes referred to as “diversifiable risk”).