Beta is the slope of the characteristic regression line. Beta describes the relationship between the stock’s return and the index returns. In the above example, beta indicates that 1 % change in NSE index return would cause 1.19 % change in the Bajaj auto stock return. Varying beta has the following implications:
- Beta = +1.0: 1% change in the market index return causes exactly 1% change in the stock return. It indicates that the stock moves in tandem with the market.
- Beta = + 0.5: 1% change in the market index return causes exactly 0.5% change in the stock return. The stock is less volatile compared to the market.
- Beta = +2.0: 1% change in the market index return causes exactly 2% change in the stock return. The stock is more volatile When there is a decline of 10% in the market return, the stock with a beta of 2 would give a negative retrurn of 20%. The stocks with more than I beta value is considered to be risky.
- Negative beta value indicates that the stock return moves in the opposite direction to the market return. A stock with a negative beta of –1 would provide a return of 10%, if the market return declines by 10% and vice-versa.
Note: Stocks with negative beta resist the decline in the market return. But stocks with negative returns are very rare.