Beta investing School
Published:Wednesday | June 15, 2011 | 12:00 AM
In investment circles the beta of a stock refers to a number describing the relationship between the return on a particular investment and the overall market. You can think of beta as the tendency of a security's returns to respond to swings in the market.
A beta of one indicates that the security's price will move pretty much in line with the market, so if the market goes up by 10 per cent that security will typically go up by around 10 per cent.
A beta of less than one means that the security will be less volatile than the market, so if the market goes up by 10 per cent that security will typically go up by less than 10 per cent, while if the market falls by 10 per cent that security will typically fall by less than 10 per cent.
A beta of greater than one indicates that the security's price will be more volatile than the market. so if the market goes up by 10 per cent that security will typically go up by more than 10 per cent, while if the market falls by 10 per cent that security will typically fall by more than 10 per cent.
In constructing a portfolio you can think of stocks with beta greater than one as your aggressive investments. They are your Chris Gayle stocks, so to speak, in that there is the potential for great returns but also great risk and volatility.
Stocks with betas of less than one are your defensive investments. They are your Shiv Chanderpaul, Brendan Nash stocks, so to speak - not exciting or glamorous but there for you whatever the conditions.
In building a portfolio you need a judicious mix of both. Many utilities stocks have a beta of less than 1. Conversely, most high-tech stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.