Beta

A mathematical measure of a security’s volatility in comparison with another benchmark. Theoretically, if a stock has a beta of 1, it would swing exactly in tandem with the market, a beta of more than 1 would indicate a higher volatility compared to the market and vice versa. Conservative stocks like consumer staples tend to have betas lower than 1 and hot growth stocks may have betas higher than 1, indicating more potential volatility.
However, mixing volatility with risk alone may be mislead. Buffett believes that “Beta doesn’t tell you a thing about a stock.” A stock that fell sharply in a short period of time would see its beta increase, whereas its risk may be smaller with the lower price.
Gold stocks have been said to have negative betas but this is not the case. A notable period would be 1970-1980s, but that was during hyperinflationary times, when the price of gold was highly negatively correlated with the rest of the stock market. But in recent years, such a correlation does not appear to exist perfectly(i.e. in the 2003-2007 bull market in stocks in the US, we have also seen a huge bull market in gold)

Related Terms

Popular Articles