Is the Beta Coefficient relevant?

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Jeffery Hunt
Jeffery Hunt's picture
Is the Beta Coefficient relevant?

Hello,

Studying finance in college we learned about the beta coefficient, and I see it published alongside stock information on finance sites. However I heard from more than one friend that it's no longer relevant and it's only there for legacy reasons. I'd love some clarification. Thanks!

Jason Pride
Jason Pride's picture

The beta value of a stock indicates how the individual stock behaves when compared to the overall market. The beta value will tell you if the stock value (generally) increases or decreases with the market and by how much. In a situation where you are attempting to diversify to eliminate risk in your portfolio you will want to have different stock with opposing beta values. If you purchase all stock with a beta of 1, your portfolio will follow the market and lose value when it drops. To overcome this risk you might also buy some stock with a beta of -1 so that when the market drops your first stock will lose value, but your second will gain an minimize your losses.