Beta or famously known as beta coefficient signifies a stock, a fund, and a portfolio’s volatility in comparison with the whole market. Meanwhile, the S&P 500 is a benchmark index used as a proxy measurement for the market. Knowing this approach is beneficial for investors in order to decide whether an investment is worth the risk. Its baseline number is one. It shows that the security’s price moves exactly like how the market moves. In other words, less than one beta means the security is less volatile than the market. On the other hand, if beta is higher than one it shows that the price is more volatile than the market.
With the same scenario, if it points 1.5, it means that it is 50% more volatile than the whole market. The similarity between alpha and beta is that both are historical numbers. Basically, agreeable betas are different across companies and sectors. Many high-tech N asdaq-listed stocks have a beta higher than one. On the other hand, many utility stocks commonly have a beta less than one. It means that the tech stocks have the greater possibility of returns. However, it also means that it carries more risks. Utility stocks, in this case mean that they are for steady earners.
When we learn about alpha previously, positive alpha is more desirable than the negative one. It is on the other hand, is not as clear-cut. This becomes the reason why retirees or risk-averse investors look for a steady income or lower. Risk-tolerant investors looking for bigger returns are mostly likely to invest in higher beta stocks. To get benefit from this strategy, the stock should be related to the benchmark used in the calculation.
