Beta measures how much a stock tends to move relative to the market as a whole. It captures a stock’s sensitivity to broad market swings: a beta of 1 moves in line with the market, above 1 amplifies its moves, and below 1 dampens them.
It is a measure of systematic risk — the part of a stock’s volatility that comes from the market itself, which cannot be diversified away.
By construction the market’s own beta is 1.0; individual stocks are measured against it.
A stock with a beta of 1.3 tends to move about 30% more than the market: when the market rises 10%, the stock tends to rise roughly 13% — and to fall about 13% when the market drops 10%.
A defensive stock with a beta of 0.7 would move only about 7% for the same 10% market swing — less upside in rallies, but a smaller drop in selloffs.
Use beta to gauge how much a position adds to a portfolio’s overall volatility, and to blend risk across holdings. It is also a key input to the cost of equity in the CAPM model — and therefore feeds into WACC and valuation.
Beta matters most in portfolio construction, where balancing high- and low-beta names shapes overall risk, and in estimating discount rates for valuation.
Beta is backward-looking and can be unstable, shifting as the measurement period or benchmark index changes. It captures only market-correlated risk, saying nothing about company-specific dangers like a failed product or fraud. A low beta is not the same as a safe business.