Beta measures how much a stock's price tends to move relative to the overall market. A beta of 1 means the stock moves with the market; above 1 means it is more volatile; below 1 means it is less volatile. Beta is the risk input in the CAPM formula used to estimate cost of equity.
Worked example
A stock with a beta of 1.5 would be expected to rise about 1.5% when the market rises 1%, and fall about 1.5% when the market falls 1%. A utility with a beta of 0.6 would move only about 0.6% for the same 1% market move.
Why it matters
Beta is the bridge between market risk and required return: higher beta raises the cost of equity, which raises WACC, which lowers a DCF-based valuation. It captures only market-wide risk, not company-specific risk.
Frequently asked questions
It is calculated statistically from the historical correlation between a stock's returns and the market's returns, usually over one to five years.