Beta is the measure of the volatility of a particular stock in comparison with the market. It indicates the stock’s correlation with the market index and cautions on the risk associated with it. Since volatility is an inherent aspect of the stock market, ‘beta’ helps you choose stocks according to your risk appetite.

In simple terms, Beta is a tool that measures the sensitivity of a stock to market fluctuations. Beta represents the non-diversifiable portion of risk attached with the investment. The index (Sensex/Nifty) is the base for arriving at the correlation between the stock and the market.

The market (index) risk is equated to 1. If the beta of a stock is greater than 1, it means the stock is more volatile than the market and sends a high risk signal! If less than 1, then the stock is a good bet for conservative investors as it would be less volatile than the market.

For example, JP Associates has a beta of 1.63 while Hindustan Unilever’s beta is only 0.43. This indicates that JP Associates is 63 per cent more risky than the Sensex and Hindustan Unilever 57 per cent less risky than the index. Essentially, if the index falls by say 10 per cent, JP Associates would correct by 16.3 per cent and HUL only by 4.3 per cent.

But, as it is always, higher rewards come with higher risk and so are high beta stocks. At times of market boom, high beta stocks deliver higher returns; but for the risk averse amongst you, high beta stocks may not be the right pick. The moment index turns down your high beta stocks will burn big holes in your pockets.

Another feature of high beta stocks is that they are characterised by high liquidity.

Besides, Beta can also guide you on expected returns. Say you anticipate the Sensex or Nifty to give a 9 per cent return, then a stock with beta of 1.7 should give a return of 15.3 per cent as a premium for the risk you have taken. To rationalise the risk borne, a high beta stock should be a top performer in its sector with strong earnings growth history.

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