Beta (β): How Much It Swings Relative to the Market

Beta (β) is a risk metric that shows how much an asset swings together with the "whole market." Here, the market usually means a representative index like the KOSPI or the S&P 500.

The reference point is 1.

- Beta = 1: it moves about the same amount the market moves. - Beta > 1: it swings "more" than the market. It tends to rise more when rising and fall more when falling. - Beta < 1: it swings "less" than the market. It is relatively calm. - Beta < 0 (negative): it tends to move "opposite" to the market.

For example, a stock with a beta of 1.5 is interpreted as tending to rise about 15% when the market rises about 10% in a day. Conversely, it also means it may move to fall about 15% when the market falls 10%.

The formula for beta is this.

β = covariance(asset return, market return) ÷ variance(market return)

It sounds hard, but the meaning is simple.

- Covariance: a value measuring "how much my asset and the market moved together in the same direction." - Variance: a value measuring "how much the market return jumped around."

That is, beta expresses as a ratio "how much my asset shook along, relative to how much the market shook." In practice, you calculate it using price data over a certain past period (usually 1, 3, or 5 years).

One important point. The beta value of the same stock can change depending on how many days you set the calculation period to, and what you use as the benchmark. So rather than declaring "this stock's beta is definitely such-and-such," you must look at it together with what basis it was measured on.

In the actual market, assets tend to have different betas depending on their nature.

- High beta (greater than 1): stocks like tech stocks with big growth expectations often fall here. According to sources, a tech company with a beta of about 1.75 tends to swing about 175% of the market's move. Thrilling when it rises, but it hurts more when it falls.

- Low beta (less than 1): utility companies like electric and gas are representative. For example, a utility with a beta of 0.45 tends to swing only about 45% of the market's move, so it is relatively calm.

- Negative beta (less than 0): assets that tend to move opposite to the market. For example, a gold-related asset with a beta of -0.2 may go the other way, falling about 2% when the market rises 10%. That said, gold does not "always" go opposite—remember it varies by period.

The key is this. A high beta doesn't mean a "good stock," and a low beta doesn't mean a "bad stock." The character of the swing is simply different.

Beta is convenient but not all-powerful. Knowing its limits, in fact, lets you use it properly.

First, beta is calculated from "past" data. Swinging like this in the past doesn't guarantee it moves the same way in the future. In fact, a famous study (Fama-French, 1992) pointed out that the beta of individual stocks does not predict future returns well.

Second, beta changes over time. Another study (Blume, 1975) found that the beta of individual stocks tends to creep back toward 1.0 as time passes. If a company changes its business or makes a large merger or acquisition, its beta also changes.

Third, beta measures only "the risk that moves with the market (systematic risk)." Events specific to a particular company (accidents, lawsuits, management risk, etc.) are not well captured in beta.

So beta is best used as a compass to reference "how much this asset has the character of swinging relative to the market." What really matters is how deeply it actually fell (maximum drawdown) and how long it took to recover that loss. At 'Returns of Almost Everything,' you can compare the maximum drawdown and drawdown period of various assets with your own eyes.