Saving, Managing Debt, and Budgeting


What is the “beta” of a stock or mutual fund?

The beta of a stock/mutual fund is the result of a mathematical equation that measures the volatility of that stock/mutual fund when compared against some benchmark, such as other stocks of similar qualities or, in the case of a mutual fund, a benchmark index. Beta measures how the price of a stock or mutual fund might react to changes in price of the benchmark. The benchmark and the investment vehicle may be highly correlated; if the benchmark price increases, so does the investment vehicle, and vice versa. Accordingly, an investment such as a mutual fund with a beta of 1.0 will have a price that will, more likely than not, move with the market. It is closely matched with its benchmark, but a mutual fund with a beta less than 1.0 will not move with the market. A mutual fund or stock with a beta of 1.2 will be about 20% more volatile than its benchmark.


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