Series 79: 3.5.7. Beta

3.5.7. Beta

A stock’s volatility is the tendency for its price to fluctuate over a short-term period. A stock that is subject to wide swings in price over a month or a week (or even a day) is said to be volatile, or to have high volatility. A stock with a fairly stable price has low volatility.

While the fact that a stock is (or is not) volatile is interesting in itself, a more useful consideration is the stock’s beta. Beta is a measure of a stock’s average volatility relative to the volatility of the overall market. The volatility of a market index, such as the S&P 500, is typically used to represent the volatility of the market as a whole, which is considered to have a beta of 1.0. A stock with a b