by S. Wade Hansen
Why Worry About Beta Diversification?
Beta diversification helps you maintain a balanced portfolio by identifying stocks that don't always react to market news the same and move in the same direction. 
What is Beta?
Beta is an indicator that measures how closely related the movement of a stock is to a broad index of stocks, like the S&P 500. Every stock has a beta value. The following will help you interpret what those beta values indicate:
Beta = 1
Indicates that the stock moves in tandem with the S&P 500. If the S&P 500 goes up, the stock will usually go up. If the S&P 500 goes down, the stock will usually go down.
Beta > 1
Indicates that the stock moves in the same direction as the S&P 500, only faster. If the S&P 500 goes up, the stock will usually go up faster. If the S&P 500 goes down, the stock will usually go down faster.
0 < Beta < 1
Indicates that the stock moves in the same direction as the S&P 500, only slower. If the S&P 500 goes up, the stock will usually go up slower. If the S&P 500 goes down, the stock will usually go down slower.
Beta < 0
Indicates that the stock moves in the opposite direction as the S&P 500. If the S&P 500 goes up, the stock will usually go down. If the S&P 500 goes down, the stock will usually go up.
By maintaining a portfolio of stocks that have different betas, you protect yourself from having all of your stocks drop in value at the same time.
NEXT: Learn more about Market Diversification and Sector Diversification.
Keep up with us:
|
