Beta
Beta Coefficient · Market Beta
A measure of a stock's sensitivity to movements of the overall market — how much the stock "swings" compared to the index.
What it is
Beta measures a stock's volatility relative to a market index (typically S&P 500):
- →Beta = 1.0 → stock tracks the market
- →Beta > 1.0 → stock is more volatile than the market (e.g. Beta 1.5 = when market drops 10%, stock drops ~15%)
- →Beta < 1.0 → stock is less volatile (defensive character)
- →Beta < 0 → stock moves opposite to the market (rare — gold ETFs, put options)
Beta is estimated from historical data (typically 5 years, monthly or weekly returns).
Why track it
Beta is an input parameter for calculating the cost of equity in the CAPM model:
Higher Beta → higher Ke → higher WACC → lower DCF valuation (same cash flows discounted at a higher rate → lower intrinsic value).
Practical translation:
- →Beta 0.5 = during a 20% market decline the stock historically fell only ~10% — suitable for a conservative portfolio
- →Beta 1.5 = during a 20% market decline the stock historically fell ~30% — higher risk, but also higher upside in a bull market
- →Beta < 0 = negative correlation with the market (gold ETFs, put options) — serves as portfolio insurance
Note: Beta is backward-looking — it measures historical behavior, not the future. A company undergoing transformation (spin-off, merger, change of business model) may have a misleading historical beta.
Real-world example
Microsoft: Beta ~0.9 (5-year monthly). During an S&P 500 decline of 10%, Microsoft historically fell ~9% — a mildly defensive character thanks to ~80% recurring revenue share.
Result in WACC: 4.4% + 0.9 × 5.25% ≈ Ke 9.1% → WACC ~9.0%.
Contrast: NVIDIA (Beta ~1.6) during the same market decline historically falls ~16% — higher Ke, higher WACC, structurally lower DCF valuation ceteris paribus.