What is beta in finance?

.. Beta is a term used in trading to indicate volatility or systematic risk of an asset compared to that of the overall market. Beta is one of the 5 technical risk ratios, is also sometimes known as the beta coefficient, and is calculated using regression analysis.

Why do analysts use beta?

Analysts use beta when they want to determine a stock's risk profile. High-beta stocks, which generally means any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential; low-beta stocks, those with a beta under 1.0, pose less risk but also usually lower returns.

How is beta calculated?

Beta effectively describes the activity of a security's returns as it responds to swings in the market. A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period.

Is beta a good measure of risk?

Beta is only one measure of risk and should not be used in isolation. Beta values can change over time, so it is essential to monitor them regularly. Beta can be affected by market conditions, so it may not be accurate in all cases. Beta only measures past volatility, and past performance does not guarantee future results.