How does one evaluate the performance of a stock against the market? In a nutshell, beta measures the relationship between the returns of a stock and the market’s value. Stocks with a beta of two follow the market by a factor of two. When the market falls by 3%, stocks with a beta of two fall by 6%. Conversely, stocks with negative betas move in the opposite direction. When the market goes up, their shares decline by 9%, while the opposite occurs.
Beta is the statistical measure of the stock’s volatility, and is an important factor in determining a stock’s riskiness. Beta is calculated using the S&P 500, which usually is a proxy for the market. Stocks with high betas move higher than the market, while those with low betas move lower than the market. This ratio can be a helpful tool in identifying a stock that’s likely to increase in value, but also has a high risk of falling below the market’s average.