What is a company’s beta?

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This is a topic that I recently dealt with within an assignment for class.  Investopedia defines a company’s beta as “a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.”

Illustration of Beta

According to the third edition of Corporate Finance: Core Principles & Applications, when you graph the return on the particular security on theY axis and the return on the market on the X axis, the slope of the line is the Beta.

A beta of 1.21 would mean that for every 1% that the market moves, the company would move 1.21%.  A high beta  would mean that the company is risky.  If the return on the market goes down at all, the return on the security goes down much faster.

Chances are, you will not find a stock with a negative beta but it would mean that the return goes up when the return on the market goes down.

If the beta is zero, it means that the market has no influence at all on the security.

If a security has a beta of one, it means that the return moves with the fund.  An example could be an index fund.

If the security has a beta greater than one, the security is more volatile than the market.

How do you find a company’s beta?  One way is to go to finance.yahoo.com and look under key statistics.  If you prefer to you Google Finance, the same number is listed at the top of the page, next to the stock quote.