What Is Beta in Stocks?

Beta measures how strongly a stock's price has reacted to movements of the whole market. A beta of 1 means the stock has moved with the market, 1.5 means half again as much, 0.5 means half as much. It is a number about past sensitivity to the market, not about the quality of the business or what the price will do tomorrow.

How it's calculated#

Beta = Covariance(stock returns, market returns) / Variance(market returns)

In practice it is the slope of a regression line, with the index's returns on the horizontal axis and the stock's returns for the same weeks or months on the vertical one. Say that in months when the index gained 2% the stock gained about 3% on average, and when the index lost 2% the stock lost about 3%. Its beta is around 1.5.

The result depends on three choices: the index, the length of the window and the frequency of the data. The same company's beta computed from two years of weekly data and from five years of monthly data can differ by several tenths. That is why different sources print different betas for one stock, and none of them is wrong.

A real example#

In 2025, Walgreens Boots Alliance agreed to be taken private by Sycamore Partners. In the proxy statement filed with the SEC on June 6, 2025, a financial advisor to the board described how it estimated the company's cost of equity. It used a beta of 1.30 as of February 14, 2025, the last trading day before market speculation about a revived deal, a risk-free rate of 4.5% based on the 10-year US Treasury yield, and a market risk premium of 6%. Companies do not report their own beta, so a takeover proxy is one of the few filings where one appears. The proxy calls it a predicted beta: a model estimate of forward-looking sensitivity, not the simple regression on past returns described above.

The capital asset pricing model combines them in one line: 4.5% + 1.30 × 6% = 12.3%. That was the cost of equity the advisor used to discount its projected share value. A beta three tenths above 1 raised the required return by 1.8 percentage points above what an average-beta stock would need, and that fed straight into a lower valuation.

The date deserves a second look. The advisor took the beta as of the day before the speculation began. After that day the share price reacted to deal rumors as much as to the market, so any beta measured over that stretch would have described the rumors. It is a good illustration of how much beta depends on the period it is measured over.

How to read it#

Beta says something useful about companies tied to the economic cycle: luxury goods makers, airlines and technology companies tend to have betas above 1, utilities and food producers below. For a portfolio, the average beta indicates how it is likely to behave in a large market move.

Beta is more a tool of a model than a description of a company. It measures only the market-related part of risk, and only as it looked in the past. A company that has changed its business model, its leverage or its size can have a very different sensitivity today from the one its five-year beta shows.

What to watch for#

Beta ignores company-specific risk: losing a large customer, a lawsuit, a regulatory change. A low beta does not mean a safe company, only one whose share price has reacted weakly to the market in the past.

The second trap is leverage. Debt pushes beta up, because a change in the value of the business translates more strongly into the value of the shares. Analysts comparing companies with different debt loads therefore convert beta to an unlevered version and back.

Related terms#

Enterprise value is the output of the kind of valuation in which beta sets the discount rate. Market capitalization describes company size, which often goes with a lower beta. Where the discounted cash flow model that beta feeds tends to break is covered in the DCF model and where it breaks.