Beta definition

A financial instrument’s beta is a measure of its risk or volatility when compared to the wider market.

It is mainly used in the capital asset pricing model (CAPM), a popular financial model used to balance the inherent risk of an instrument with its expected return. More volatile markets are capable of providing higher returns, but are also riskier to invest in.

Beta is listed as a scale. If an instrument has a beta of one, its volatility matches that of its wider market. If its beta is less than one, it will be less volatile than the wider market; if it is greater than one then it will be more volatile.

Beta is calculated based on past form only, taking into account the historical volatility of the instrument and comparing it to the wider market.

Beta example

In shares trading, shares will often have beta below one. Utility stocks, for instance, tend to be more resistant to market moves and will as such tend to have low beta. On the other hand, highly volatile start-ups or technology companies will often have a beta well in excess of one.

Read our guide to risk management

If you’re interested in how to manage risk when trading, read our guide to risk management.

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