- 1Beta = 1.0 means the stock moves with the market
- 2Beta > 1.0 = more volatile than the market (amplifies gains and losses)
- 3Beta < 1.0 = less volatile than the market (dampens moves)
- 4Beta of 0 = no correlation with the market
- 5Low-beta stocks have historically outperformed on a risk-adjusted basis
#What Is Beta?
Beta measures a stock's sensitivity to market movements. It comes from the Capital Asset Pricing Model (CAPM), which assumes higher risk (beta) should earn higher returns.
Beta is calculated by regressing a stock's returns against market returns over a period (typically 2–5 years).
If the market moves up 10% and a stock moves up 15%, that stock has a beta around 1.5.
#Beta Values Explained
| Beta | Interpretation | Example |
|---|---|---|
| 0.0 | No market correlation | Cash, short-term treasuries |
| 0.5 | Half the market's movement | Utilities, consumer staples |
| 1.0 | Moves with the market | S&P 500 index fund |
| 1.5 | 50% more volatile than market | Growth tech stocks |
| 2.0 | Twice the market's movement | Speculative/leveraged |
| Negative | Moves opposite the market | Gold miners (sometimes) |
#Beta by Sector
| Sector | Typical Beta | Why |
|---|---|---|
| Utilities | 0.3–0.6 | Regulated, predictable cash flows |
| Consumer Staples | 0.5–0.8 | Steady demand regardless of economy |
| Healthcare | 0.7–1.0 | Mixed — pharma is defensive, biotech is volatile |
| Financials | 1.0–1.4 | Tied to economic cycles and interest rates |
| Technology | 1.0–1.5 | Growth expectations create volatility |
| Energy | 1.1–1.5 | Commodity price swings |
| Crypto-related | 1.5–2.5+ | Extremely speculative |
#The Low-Beta Anomaly
Here's the counterintuitive finding: low-beta stocks have historically outperformed high-beta stocks on a risk-adjusted basis. This directly contradicts CAPM theory.
Why? Several explanations:
- 1Leverage constraints — Investors who can't use leverage buy high-beta stocks to amplify returns, pushing up their prices
- 2Lottery preferences — Many investors prefer "exciting" volatile stocks, overpaying for them
- 3Benchmarking — Fund managers are compared to benchmarks, incentivizing them to hold high-beta stocks
This anomaly is why we include a Volatility factor in our 6-factor model, giving higher scores to lower-volatility stocks.
Read more: The Low Volatility Anomaly →
#Limitations of Beta
1. Backward-Looking
Beta is calculated from historical data. A stock's future volatility may differ dramatically.
2. Time-Period Sensitive
A stock's beta changes depending on the measurement period. Two-year and five-year betas can differ significantly.
3. Assumes Linear Relationship
Beta assumes stock returns vary linearly with market returns. In reality, stocks may be non-linearly sensitive (e.g., more downside than upside sensitivity).
4. Doesn't Capture All Risk
Company-specific risks (management, competition, regulation) don't show up in beta.
#How We Use Volatility
Rather than beta specifically, our model uses realized volatility — the actual standard deviation of returns. This captures total risk, not just market-relative risk. Lower-volatility stocks receive higher Stability factor scores.
Last updated: February 5, 2026