Beta — what it measures and how to interpret it. Beta measures a security’s historical sensitivity to overall market movements, typically using regression of the asset’s returns on a market index’s returns. A beta of 1 implies the asset tends to move in line with the market; a beta > 1 indicates amplified movements (higher market-related volatility); a beta < 1 indicates muted movements relative to the market. Investors use beta to estimate how a new security will change portfolio volatility and to assess market risk exposure. For example, adding a high-beta stock to a portfolio will increase expected portfolio swings if other holdings remain unchanged.

Limitations and how to use beta prudently. Beta is backward-looking and depends on the historical period and index chosen. It captures systematic risk but not company-specific factors; two stocks with similar betas can have very different fundamental risks. Beta also assumes linear relationships and may misrepresent behavior during market stress. Complement beta with other metrics (alpha, R-squared, volatility, fundamentals) and interpret it as one input for asset allocation and position sizing—use it to build a portfolio with the desired exposure to market swings rather than relying on beta as a sole risk metric.