Why betas differ

Shares of small-cap companies shined, with the Russell gaining 20 points. Weakness in shares of Walt Disney Co. A period of rising prices has clearly arrived, although so far it has not had a major effect on financial markets.

In days gone by the Federal Reserve was much more concerned about inflation, and was more likely to raise interest rates to combat what was seen as a destabilizing threat to the economy. But after years of low inflation, the Fed is willing to wait and see if the trend calms down. Finance, you would have a different impression of their relative volatility.

Why do the values vary so much? Perhaps they are calculating the values using different periods of time for comparison. Most likely is that the services are using different benchmarks to represent the market against which the company is compared, e. Beta is a measure of the market risk or volatility of investing in a stock. It helps investors pick stocks that fall into their risk comfort zone. But what does it tell you about a stock and what mixed signals do investors get when three different Web sites report three different betas for the same stock?

It can be calculated several ways, including using regression analysis. If the stock is more volatile than the market, its beta will be more than 1, and if it is less volatile than the market, its beta will be less than 1.

For example, a stock with a beta of 0. A stock with a beta of 1. There is more than one way to calculate betas. One of the variables in the beta calculation is how far back you go with the calculation. Some calculations are based on three years of data, while others are based on five years of numbers. These variables and others can make a difference in the beta that is reported. Your best bet is to stick with names you know and trust and if you want to compare companies, use the same website since the numbers should be consistent that way.

What does beta tell investors? In investing, beta does not refer to fraternities, product testing, or old videocassettes. Beta is a measurement of market risk or volatility. That is, it indicates how much the price of a stock tends to fluctuate up and down compared to other stocks. At the end of the trading day, we conclude that "the markets" were up or down.

An investor considering buying a particular stock may want to know whether that stock moves up and down just as sharply as stocks in general. It may be inclined to hold its value on a bad day or get stuck in a rut when most stocks are rising. The beta is the number that tells the investor how that stock acts compared to all other stocks, or at least in comparison to the stocks that comprise a relevant index. Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall stock market.

In other words, it gives a sense of the stock's risk compared to that of the greater market's. Beta is used also to compare a stock's market risk to that of other stocks. Beta is calculated using regression analysis. A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market.

A beta of less than 1 means it tends to be less volatile than the market. Many young technology companies that trade on the Nasdaq stocks have a beta greater than 1. Many utility sector stocks have a beta of less than 1.

Essentially, beta expresses the trade-off between minimizing risk and maximizing return. Say a company has a beta of 2. This means it is two times as volatile as the overall market. If a stock had a beta of 0. Here is a basic guide to beta levels:. Are you prepared to take a loss on your investments? Many people are not and they opt for investments with low volatility.