Beta

Beta measures how sensitive an asset's returns are to movements in a benchmark, typically a broad market index. A beta of 1 means the asset tends to move in line with the benchmark; a beta above 1 means it amplifies market moves, and a beta below 1, including negative, means it dampens or moves opposite to them.

Beta is estimated as the slope of a regression of an asset's returns on the benchmark's returns, beta = Cov(Ra, Rb) / Var(Rb), and is the same coefficient used in the alpha regression: Rp = alpha + beta * Rb + error. Unlike volatility, which measures the size of an asset's own price swings in isolation, beta measures co-movement with something else — a stock can be highly volatile yet have a low beta if its swings are unrelated to the market.

Beta is used to size market exposure, hedge a portfolio, and estimate the cost of equity in asset-pricing models, and it is a common building block in factor investing. Practitioners should treat beta as an estimate that shifts with the time window and benchmark chosen, not a fixed property of a stock: a company's beta can rise or fall as its business mix, leverage, or the market regime changes, and betas estimated from short or unusual periods, unlike careful fundamental analysis, are often unreliable.