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Beta
How much a stock or fund tends to move when the market moves.
Detailed explanation
A beta of 1 moves in line with the index. Above 1 amplifies both rallies and falls; below 1 dampens them. Beta is estimated from past data and can shift as a company's business or leverage changes.
Formula
Beta = Covariance(asset return, market return) / Variance(market return)
Example
A stock with beta 1.4 would be expected to fall about 14% when the index drops 10%.
Why it matters
It sets expectations for drawdowns, which is usually what decides whether an investor stays invested.
Key points
- Measures market risk only, not company-specific risk.
- Defensive sectors typically show beta below 1.
- Historical beta is an estimate, not a guarantee.
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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.