Beta is a measure of a stock’s volatility relative to the market. It is calculated by comparing the stock’s price movements to the price movements of a benchmark index, such as the S&P 500.

A beta of 1 means that the stock’s price moves in the same direction as the market. A beta of less than 1 means that the stock’s price is less volatile than the market. A beta of greater than 1 means that the stock’s price is more volatile than the market.

For example, if a stock has a beta of 1.2, it means that the stock’s price is expected to move 12% for every 10% move in the market. So, if the market goes up 10%, the stock is expected to go up 12%. Conversely, if the market goes down 10%, the stock is expected to go down 12%.

Beta is a useful tool for investors to use when building a portfolio. By understanding how beta works, investors can choose stocks that are appropriate for their risk tolerance.

Here are some examples of how beta can be used by investors:

• Investors with a low-risk tolerance may want to choose stocks with a beta of less than 1. These stocks are less volatile than the market, which means that they are less likely to lose money in a down market.
• Investors with a high-risk tolerance may want to choose stocks with a beta of greater than 1. These stocks are more volatile than the market, which means that they have the potential to generate higher returns in a bull market.
• Investors who want to reduce their risk may want to diversify their portfolio by including stocks with different betas. This will help to reduce the overall risk of the portfolio.

It is important to note that beta is not a perfect measure of risk. There are other factors that can affect a stock’s price, such as the company’s financial health and the overall economic environment. However, beta is a useful tool that can help investors to make more informed investment decisions.