How it works
Beta is the slope of a regression of the asset’s returns against the market’s returns over a chosen window, typically 1 to 5 years of daily or monthly data. The market benchmark is usually the S&P 500 for US equities or a relevant local index. Beta captures only co-movement with the market; idiosyncratic risk is captured by the residual.
Example
Tesla has a 5-year beta near 2.0: when the S&P 500 moves 1 percent, Tesla tends to move 2 percent in the same direction. Utilities like SO or DUK have betas near 0.4: defensive against market moves. Gold (via GLD) has a beta near zero or slightly negative: it does not track equities. A portfolio’s weighted-average beta tells you its market sensitivity at a glance.
Why it matters
Beta is the standard tool for sizing market exposure. To halve your market risk without selling, hedge with a beta-weighted short position in the index. To target a specific market exposure, weight high-beta and low-beta names to hit the target. The limitation: beta assumes a stable relationship that holds across regimes. In crises correlations spike, betas converge toward 1.0, and the diversification beta promised disappears.
