In the investment field we cannot scoop up handsome returns if we shy away from risky stocks. The strategy is true to some extent, especially when the market is bullish. But, we should also be ready to accept huge loss if the market turns bearish.
We have developed an investment strategy which clearly shows that lucrative returns can also be generated from less risky stocks. This may sound surprising, but it is true.
Meaning of Beta
Beta measures the volatility or risk of a particular asset in comparison to the market. In other words, beta measures the extent of a security’s price movement relative to the market. In this article, we are considering the S&P 500 as the market.
If a stock has beta of 1 then the price of the stock will move with the market. So, the stock is more volatile than the market if its beta is more than 1. In the same way, the stock is not as volatile as the market if its beta is less than 1.
For example, if the market offers a return of 20%, a stock with beta of 3 will return 60%, which is overwhelming. Similarly, when the market slips 20% the stock will sink 60%, which is devastating.