What Is Beta (ß) And How Do We Use It?

What is Beta?

The Beta (ß) of a stock or portfolio is a historical measure describing the relations of the volatility of its returns an investor is exposed to as compared to the entire market as a whole.

A stock market itself has a beta of 1.00 and stocks are measured on how much they deviate from the market. A stock with a beta less than 1.00 is less volatile than the broader market, and hence its stock price does not fluctuate as much as the broader market.

Further illustrations using the TA Charts made available at ShareInvestor Station are as shown below.

Source: ShareInvestor Station Dynamic TA Chart

The first chart shows the graphs of a highly volatile stock [in red] with a positive beta of approximately 2.20 and that of the stock market proxy, the Straits Times Index (STI) [in green] with a beta of 1.00 over the same period. The widening gap between the 2 graphs during market rallies shows the greater than proportionate increase in returns of the stock relative to the returns of the broader market. Conversely, in market downturns, these high beta stocks are likely to exhibit a greater than proportionate fall in returns as compared with the returns of the broader market, hence narrowing the gap.

Source: ShareInvestor Station Dynamic TA Chart

The second chart shows that a stock[in red] with a beta closer to the stock market beta of 1.00 is more inclined to move in tandem with the broader market [in green].

Source: ShareInvestor Station Dynamic TA Chart

The third chart shows that a stock [in red] with a beta closer to 0 tends to demonstrate returns which do not correlate with the returns of the broader market [in green]. As illustrated in this chart, the stock price rose, particularly pronounced in the months of March through to July 2011 even while the broader market experienced mild consolidation.

Betas tend to vary across companies and industries.

Defensive stocks refer to stocks with betas lower than 1.00. These companies (typically stocks of large companies) generate relatively consistent earnings regardless of the economic climate. The fairly stable earnings stream contributes to the stock’s lower level of volatility.

Conversely, companies in cyclical industries typically have higher betas above the market average of 1.00. The demand for the products or services of these companies is much more susceptible to the general state of the economy, resulting in more volatile earnings and share-price fluctuations.

How is Beta calculated?

At ShareInvestor, the beta is computed using regression analysis and the input parameters are based on
– Straits Times Index (STI) as the benchmark index representing the stock market,
– Daily returns, that is, daily closing prices of both the individual stock and the Index, and
– A short term beta of 75 days and a longer term beta of 500 days.

Should I buy stocks with high or low Beta?

Risk-free rate refers to the rate of return from a default risk-free government security. An investor assuming risk from his investment seeks a risk premium above the risk-free rate.

This depends on individual investor and their risk appetite.

Conservative investors are likely to favour stocks with low beta in return for lesser price volatility whereas investors with a bigger risk appetite (high risk-high reward) will prefer higher beta stocks.

Nevertheless, investors ought to bear in mind that although stocks with low beta will not fall as much when the market is bad, they will likely be underperformers when the market recovers and rallies.

In the current market downturn, a number of research analysts are also advising investors to look into lower beta stocks as they are defensive in nature and switch out to higher beta stocks when the market is on the road to recovery.

Where can I find Beta at ShareInvestor?

There are numerous ways for you to access the beta at ShareInvestor.

1. Beta for every stock can be easily found under the Fundamental section of the Factsheet. 

Source: ShareInvestor.com

The short term 75 days beta compares the last 75 days of historical closing values of the stock with the STI while the longer term beta of 500 days uses the last 500 days of historical closing values of the stock to compute the stock’s beta. With the use of the 2 beta values, we can see in the example above that the stock used to be much more volatile (Beta: 1.455) relative to the market and the volatility of the stock has since decreased (Beta: 1.247).

2. “Stock Beta” table column layout under Prices and Portfolio

We have added a new column layout under the Prices and Portfolio section called “Stock Beta”. By selecting this view, you will be able to view the beta of a stock and compare it using a variety of filters and selection.

Source: ShareInvestor.com

Source: ShareInvestor.com

In addition, if you are using your own customised columns in your portfolio, you can also add the short term and long term Stock Beta fields into your selection.

3. Fundamental filters under Prices

We have added 4 additional selections under the Fundamental dropdown selection.
– Lowest Long Term Beta

– Highest Long Term Beta
– Lowest Short Term Beta
– Highest Short Term Beta

Source: ShareInvestor.com

This allows you to quickly find the stocks with the highest or lowest beta in the stock market.

What other points should I take note of when reviewing a stock’s Beta?

Do note that betas tend to vary over time as the company itself changes its business model and risk profile.

In the case of newly listed counters, the absence of sufficient historical price history also makes establishing a reliable beta difficult.

More importantly, as with other indicators using historical data, past performance is no guarantee of future volatility and returns.

Happy investing!