Have you ever wondered how you can quickly and easily determine the risk of a stock or stock portfolio? You can start by doing a little bit of research on the beta coefficient of investments that you are considering. The beta coefficient of a stock or stock portfolio is the measure of volatility of a stock or stock portfolio’s return versus that of the rest of the market. Typically the ‘rest of the market’ is a benchmark index which has a set beta of 1.
For example, if you are interested in a stock that has a beta coefficient of 2 (which is double the benchmark index of 1) then the stock is likely to move twice as much as the benchmark index. It’s important to note that the direction of the movement is not isolated to positive movements. In other words, the stock may climb twice as fast as the benchmark index during positive market movements, but it also might fall twice as fast as the benchmark index during negative market movements. Therefore, a higher beta coefficient means that a stock or portfolio is more volatile and a lower beta coefficient means that a stock is less volatile.
The beta coefficient can be a quick and easy way for an investor to gauge the risk of a stock or stock portfolio. Although the beta coefficient is a excellent metric to reference, you should always look at a variety of metrics when determining whether or not a stock or portfolio fits your investment objectives.