Term · Risks & Red Flags
Beta
In briefBeta measures how sensitively a stock reacts to movements in the overall market; a beta above 1 has historically indicated a stronger market reaction. For small caps, however, company-specific risk often dominates over market risk.
Definition
A measure of a stock's sensitivity to movements in the overall market. A beta greater than 1 historically means a stronger market reaction.
How it is calculated
Formula. Beta = Covariance(stock return, market return) ÷ Variance(market return).
Why it matters for small caps
In the small-cap segment stocks may exhibit high betas, but company-specific risk often dominates more strongly than market risk.
Common misreadings
- It is misunderstood as complete risk; beta does not capture liquidity, balance-sheet or management risks.
In the process
Frequently asked
What is beta?
It is a measure of a stock's market sensitivity. A beta above one means it has historically fluctuated more strongly than the market.
How is beta calculated?
You divide the covariance of stock and market returns by the variance of the market return. This yields the relative responsiveness to the market.
Why does beta not capture total risk?
It reflects only market risk. Liquidity, balance-sheet or management risks are left out.
Related terms
Sources
Primary
Kenneth R. French Data Library – Factor Data
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data\_library.html
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data\_library.html
Methodology
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.