Computation of Beta Value
As per the definition, market is assigned a default value of 1 and in its relation volatility of any of the stock is determined.
Different values of beta and their interpretations
Beta value of more than 1 : Any of the stock that shows higher volatility in comparison to the markets
holds a beta value over 1. Such beta value of over 1 signifies that the stock is relatively riskier and hence has the potential to offer large gains over a period of time. Another point to take note of is that a high beta value indicates a high degree of volatility and lesser liquidity. Eg.: Stocks of technology as well as growth-oriented companies are known to hold beta value over 1.
Beta value of less than 1: Any of the stock that registers less volatility when compared with the markets or benchmark indexes holds beta value below 1. Beta value below 1 is reflective of the stock being relatively less riskier and hence would offer lower returns in due course of time. Eg. : High-liquidity stocks and blue-chip companies hold a beta value of less than 1
Beta value of 1: Stocks with beta value of 1 suggest that the price movement in such stocks is in tandem with the overall market conditions or benchmark indexes. Index-related products hold a beta value of 1.
Zero Beta value: A rare case of study that suggest that the stock price does not show any movements or volatility in relation to markets.
Beta value and its relevance for common investors
Though beta measure used in stock analysis and valuation enables determination of price risk. The measure has its constraints for investors seeking to factor in fundamental risk factors.