Beta

Beta measures sensitivity to market movements, which reflects systematic risk. It is calculated from past returns, comparing how an investment moved with how a market index moved over the same period.

A share with a beta of 1.5 has historically tended to rise about 15% when the market rose 10%, and to fall about 15% when the market fell 10%. A share with a beta of 0.6 has tended to move only about 6% for every 10% move in the market. A beta near zero means the investment has moved largely independently of the market.

Companies in sectors such as technology or luxury goods often have higher betas, because their profits are sensitive to economic conditions. Utilities and consumer staples, such as food producers, often have lower betas.

Beta is a key input in the Capital Asset Pricing Model, which uses it to estimate a share's expected return and a company's cost of equity. Its limitations are that it is based on past data, which may not predict the future, and it captures only market-related risk, not risks specific to the company.