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Saving, Managing Debt, and Budgeting

Beta

How do I use beta to analyze an investment choice?

You use beta calculations by first looking at the beta of a benchmark and the expected return of this market index. If the beta of the market as a whole is 1.0, and this broad index returns to investors 8% per year, an investment choice with a beta 50% greater (1.5), should provide a return of approximately 12% (since 12% is 50% greater than the 8% return of the broader index). If, through careful analysis, you do not see this investment choice providing this level of return, it is typically filtered from the list of possible investment choices.



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