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Financial Dictionary - Beta (â)

Beta (â)

The beta of an investment fund measures the variability or sensitivity of the fund's return compared to the variability in the benchmark's return caused by market fluctuations.

Beta measures whether a particular fund is more or less unstable compared to its benchmark—knowing this, a manager can know the what market exposure it is facing. Beta does not measure the absolute risk of the fund, but the relative risk.

A beta greater than 1 implies greater variations, both upwards and downwards, than its benchmark index. A beta value of 1.0 is indicative of a strong correlation with the market. Lastly, a beta value of less than 1.0 implies less volatility than the market.

Beta of a financial asset

Betas are quite common in financial markets, especially in markets where equities are traded. In this case, the benchmark index is usually the stock exchange index where the financial asset is listed. For example, the Ibex35 for shares listed on that stock market; or the S&P 500, for shares listed on the New York Stock Exchange.

The beta coefficient

The beta coefficient is a very useful source of information. Investment managers use as it a reference when adding or removing securities within a portfolio, to manage a portfolio's systematic risk. The beta coefficient explains price volatility or instability in the financial markets, such as actions caused by changes in volatility on the stock market affected by a change in the benchmark index.

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