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Beta

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market return. Beta is calculated using regression analysis. You can think of beta as the tendency of a security’s returns to respond to swings in a market. A beta of 1 indicates that the security’s price will move with the market. A beta less than 1 means that the security will be less volatile than the market and a security more than 1 means that the security is more volatile than the market. For example: a beta of 1.2 means that the security is 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering a possibility of higher rate of return, but also posing more risk.

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