How To Interpret A Beta Coefficient

A beta coefficient is calculated by a mathematical equation in statistical analysis. The beta coefficient is a concept that was originally taken from a common capital asset pricing model that shows an individual asset's risk as compared to the overall market. This concept measures how much the particular asset shifts in relation to a broader spectrum. The beta coefficient can be helpful in trying to predict a particular stock's tendencies and calculate the overall risk.

Step 1

Analyze the data in question. If a particular asset carries a beta coefficient of 1, it has about the same volatility as the relevant market benchmark, meaning the security shifts less than the overall market index.

Step 2

Look at beta coefficients above 1. Betas above 1 indicate the asset is more volatile and pose a higher risk. They are shifting more than the market as a whole.

Step 3

Understand to what the beta coefficient is compared. For all U.S. assets, a specific stock's beta coefficient generally measures its volatility against the S&P 500 index. For example if a stock generally moves five percent for every one percent change in the S&P 500, it has a beta coefficient of 5. This is a higher risk and shifts more than the market as a whole. This particular stock might offer a greater return than those with lower betas, but it poses a much higher risk.