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Question: Would you explain what Beta is? I own shares of General Electric, Cisco and Family Dollar Stores. What are their betas and what do they mean?

T. Bailey

Answer:

Dear T. Bailey,

Beta is a means of figuring out a stock's price volatility in relationship to the rest of the market. It is measured against the Standard & Poor's 500 Stock Index, which has a beta coefficient of 1.

That means that any stock, whether or not it is in the S&P 500, with a beta over 1 is generally more volatile than the market as a whole. And, of course any stock with a beta below 1 is expected to rise and fall more slowly in price than the market.

More specifically, beta is a measure of the average percentage change in the price of a stock relative to the average percentage change of a market index.

If you are a conservative investor, you will want to consider low beta stocks. On the other hand, if you're willing to take more risk, hoping for high rewards, you may be comfortable adding stocks with a beta greater than 1 to your portfolio.

Some portfolio managers try to outperform the market by putting high-beta stocks into their portfolios when the market is expected to rise and low-beta stocks when they think the market will fall.

A Word Of Caution...

Beta is not a perfect tool. First of all, a beta never remains constant, so it cannot be 100% accurate in predicting the future.

Second, although high beta stocks are more likely to rise in a strong market, their declines can be very severe in price in a down market.

Finally, many factors can have an impact on a stock's price movement, so resist using beta as your only guide in picking equities.

At BuyandHold, you can check a stock's beta by looking at the "Quotes" screen for an individual company in our Research Stocks area.

Here are the figures for your three stocks:

Company/Symbol	Price	52 Week High/Low	Beta
Cisco (CSCO)	$14	$20 / $8	2.09
General Electric (GE)	$23	$41 / $21	1.05
Family Dollar Stores (FDO)	$29	$37 / $23	0.88

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