How to Interpret a Beta Coefficient

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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.

    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.

    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.

    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.

    Tips

    • The beta coefficient should only be used as a guide and does not predict the future.

References

About the Author

Dianne Christensen began writing professionally in 2003 for the "Muskegon Chronicle" in Muskegon, Mich. She has a Bachelor of Science in journalism from Grand Valley State University in Allendale, Mich.

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