Skip to content

Beta (β)

OVERVIEW

Beta (β) measures how much a security's price moves when the broad market moves. A beta of 1.0 means the stock has historically moved one-for-one with its benchmark. A beta of 1.5 means a 1% market move has been associated with a 1.5% move in the stock. A beta of 0.5 means the stock moves half as much. Negative betas — rare outside of inverse ETFs, gold miners, and some volatility products — indicate a security that moves opposite the market. Beta is the single number that captures a stock's market-risk exposure and is the core input to the Capital Asset Pricing Model (CAPM).

Beta Value Interpretation
1.0 Moves one-for-one with the benchmark
1.5 Moves 1.5% for every 1% market move
0.5 Moves half as much as the market
< 0 Moves opposite to the market

Note

Negative betas are rare outside of inverse ETFs, gold miners, and select volatility products.

HOW BETA IS CALCULATED

Beta is the slope coefficient of a linear regression of the security's returns against the benchmark's returns:

Covariance form:

β = Cov(R_asset, R_market) / Var(R_market)

Correlation form:

β = ρ × (σ_asset / σ_market)

Where ρ is the return correlation and σ is the standard deviation of returns. The standard computation uses 60 monthly returns (5 years) regressed against the S&P 500 or a total-market index. Short-window daily betas (1 year of trading days) are more current but noisier and far more regime-sensitive.

Computation Window Characteristics
60 monthly returns (5 years) vs. S&P 500 Standard; stable but lagged
1 year of daily returns More current; noisier and regime-sensitive

WORKED EXAMPLE

The following betas are calculated using 5 years of monthly returns through March 2026, regressed against SPY.

Security Beta R² Notes
NVDA 1.68 0.44 56% of variance is idiosyncratic (AI demand, product cycles, export controls)
DUK (Duke Energy) 0.43 — Regulated utility cash flows damp market sensitivity
TSLA ~1.50 — Drifted down from ~2.3 in 2022 as float expanded and speculative flows normalized

Tip

In a $100,000 portfolio split evenly across NVDA, DUK, and TSLA, portfolio beta = (1.68 + 0.43 + 1.50) / 3 ≈ 1.20 — roughly 20% more market-sensitive than SPY alone.

WHEN TRADERS USE BETA

Portfolio construction

Target a portfolio-level beta by weighting high- and low-beta holdings.

Stance Target Portfolio Beta
Aggressive ~1.3
Neutral ~1.0
Defensive ~0.7

CAPM expected return

E(R) = R_f + β × (R_m − R_f)
  • R_f — sourced from the 10-year Treasury yield
  • Market-risk premium — historically ~5–6%

Beta-weighted delta for options books

Express delta in SPY-equivalent units to hedge a mixed book with a single SPX or ES position.

Relative-value screens

Stocks combining low beta with a positive regression intercept (alpha) represent the core quant screening target.

LIMITATIONS AND COMMON MISCONCEPTIONS

Note

Beta is backward-looking and statistically unstable. TSLA's beta halving in three years illustrates that the number you regress today may not hold tomorrow.

Limitation Detail
Non-linearity during crashes Correlations spike toward 1; high-beta names fall far more than linear beta predicts
Low R² for single stocks R² is typically below 0.5, meaning most variance is idiosyncratic; beta-hedging leaves substantial residual risk
Single-factor under-specification Fama-French and Carhart models extend beta with size, value, and momentum factors
Low beta ≠ low risk A stock with β = 0.3 and 60% annualized idiosyncratic volatility is riskier than a β = 1.0 index ETF