Task 2: Reading Beta
Perhaps the single most important measure of stock risk or volatility is a stock's beta. It's one of those at-a-glance measures that can provide serious stock analysts with insights into the movements of a particular stock relative to market movements. The concept of beta is fairly simple; it's a measure of individual stock risk relative to the overall risk of the stock market. It's sometimes referred to as financial elasticity. The measure is just one of several values that stock analysts use to get a better feel for a stock's risk profile. The beta value is calculated using price movements of the stock we're analyzing. Those movements are then compared to the movements of an overall market indicator, such as a market index, over the same period of time. Click on the link below to watch a video on beta.
Beta Rules of Thumb
Beta values are fairly easy to interpret too. If the stock's price experiences movements that are greater - more volatile - than the stock market, then the beta value will be greater than one. If a stock's price movements, or swings, are less than those of the market, then the beta value will be less than one. Since increased volatility of stock price means more risk to the investor, we'd also expect greater returns from stocks with betas over one. The reverse is true if a stock's beta is less than one. We'd expect less volatility, lower risk, and therefore lower overall returns.
Lower Beta=Lower Risk=<1
Higher Beta=Higher Risk=>1
Click on the URL link below and watch the short video.