What Is Beta?
Beta measures how much a stock or fund tends to move with the overall market. How to read it, what it means in the capital asset pricing model, and its limits.
In one sentence
Beta. A measure of how much a stock adds to the risk of the overall market. Above 1 means more than average; below 1 means less.
How it works
Beta compares an investment's moves with the market's. A beta of 1 means it has tended to move in line with the market; above 1, more; below 1, less. It's calculated from past returns, usually against a broad index.
| Holding | Beta | Expected move from the market alone |
|---|---|---|
| Utility company | 0.5 | About −5% |
| Broad index fund | 1.0 | About −10% |
| Fast-growing tech company | 1.6 | About −16% |
On top of that, each company has its own news, which beta doesn't capture.
Beta in theory
In the capital asset pricing model, beta is the only risk investors are paid for: a share's beta indicates its contribution to the risk of the whole market portfolio, and its expected risk premium rises in proportion to beta.1 Company-specific risk, the idea goes, can be diversified away, so it shouldn't earn extra return.
Its limits
Beta looks backward and changes over time. It measures how a holding moves with the market, not its total risk: a stock with a low beta can still be very volatile for reasons of its own.
Learn it properly
- Cost of Capital in DepthCorporate Finance (depth track)
- Covariance, Correlation, and BetaPortfolio Theory and Risk (depth track)
- Cost of CapitalPart 4: Research and Valuation
Notes and sources
- Nobel Prize Outreach. The Prize in Economic Sciences 1990: Press release. Checked 2026-10-11. Back to text