Beta is a measure of the volatility , or systematic risk , of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model CAPM , which calculates the expected return of an asset based on its beta and expected market returns.

Beta is also known as the beta coefficient. Beta is calculated using regression analysis.

Beta represents the tendency of a security's returns to respond to swings in the market. A security's beta is calculated by dividing the covariance the security's returns and the benchmark's returns by the variance of the benchmark's returns over a specified period. A security's beta should only be used when a security has a high R-squared value in relation to the benchmark. The R-squared measures the percentage of a security's historical price movements that could be explained by movements in a benchmark index.

For example, a gold exchange-traded fund ETF , such as the SPDR Gold Shares, is tied to the performance of gold bullion.

When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, would increase the accuracy of the beta measurement.

Looking for the beta of a specific stock? Find out which brokers offer the best research tools here. A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market.

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A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1. Conversely, if an ETF's beta is 0.

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Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

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For example, as of May 31, , the PowerShares QQQ, an ETF tracking the Nasdaq Index, has a trailing year beta of 1. Test your beta knowledge and read more here: Know the Risk and Calculating Beta: Portfolio Math for the Average Investor. Dictionary Term Of The Day.

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