Beta

Beta measures market risk, also known as systematic risk. A 1992 Journal of Finance article by Fama and French, The Cross-Section of Expected Stock Returns, shows past and current beta are not a good predictor of future beta—at least when it comes to individual stocks. Fama and French suggest stock betas tend to mean revert; a stock with a past beta of 1.5 or 0.8 should tend to move toward 1.0 in the future.

 

The stock market, as measured by the S&P 500, always has a 1.0 beta, whether the market is flat, going through a bull market or crashing. For example, if the ABC Growth Fund has a 1.3 beta, its market-related volatility suggests the fund will move 30% > the S&P 500. For a non-diversified stock portfolio, unique characteristics of a company, referred to as unsystematic risk, can result in the company’s stock price to move much more or less than market-related (systematic risk) volatility. Table xx shows the beta of select industries based on January 2015 data (NYU, 2015).

 

Table 4

Beta of Select Industries 2015

 

Industrya	Beta		Industrya	Beta
Large banks  (13)	0.8		Insurance--general  (24)	1.0
Computer Services  (119)	1.2		Oil/gas production  (392)	1.3
Drugs--Pharmacy  (151)	1.0		Precious metals  (147)	1.3
Entertainment  (84)	1.2		REITs  (213)	0.8
Healthcare products  (261)	1.0		Utility—general  (21)	0.6

Note. All information for this table is from the NYU Stern School of Business (2015)

^aNumber of corporations within the industry is shown in parentheses.