Beta

Beta measures how much a stock's price moves relative to the broader market. A beta of 1.0 means the stock moves in line with the market. Above 1.0 means it is more volatile — it tends to rise more in up markets and fall more in down markets. Below 1.0 means it is less volatile than the market.

Beta is calculated using historical price data, typically over three to five years, by measuring the correlation between the stock's returns and the market's returns. It captures systematic risk — the risk that cannot be diversified away.

Using Beta in Analysis

Investors use beta to understand portfolio risk. Adding high-beta stocks increases overall portfolio volatility. Adding low-beta stocks provides stability. A balanced portfolio often combines both to match the investor's risk tolerance.

Beta also feeds into valuation models. The Capital Asset Pricing Model uses beta to estimate the cost of equity, which in turn affects the discount rate in DCF analysis. Higher beta means higher required returns, which lowers the present value of future cash flows.

In the FPI Rating, beta is one of four inputs in the stability factor. Stocks with lower beta contribute to higher stability scores. However, beta is backward-looking and may not predict future volatility, especially during market regime changes.