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Beta is a measure of the historical price movements of an investment relative to a major stock index. A beta of 1 indicates that a stock historically tends to move with the market. A beta higher than 1 indicates a stock is more volatile than the market. A beta lower than 1 indicates a stock is less volatile than the market or that its price movements aren't well correlated with the market. Beta should not be confused with risk. It is used in risk models but is not a general indicator of risk or volatility. Its use in risk models is often associated with the risk that a portfolio will all move in the same direction. It can help to catch situations in which diversification doesn't reduce risk because all stocks in a basket move together.
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Type | Investing | Definition (1) | The correlated volatility of an investment relative to a market index. | Definition (2) | A measure of non-diversifiable systematic risk. | Definition (3) | A measure of the sensitivity of an investment to moves in the broader market. | Value | Beta is a clue as to the volatility of an investment.
Beta can be used in risk models to estimate the chance that diversification will not work because a basket of investments tend to move in the same direction. | Notes | In some cases a low beta investment can be highly volatile and driven by idiosyncratic factors not related to price swings in the market.It is a common error to view beta as a comprehensive indicator of risk. | Related Concepts | |
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