Alpha and Beta

Well, I think I'll just be talking about Beta this post, but they do go together.

If you look at a typical financial summary of a traded company you'll often see a number labled Beta. For example, on this google finance page for XOM (Exxon Mobil) you'll see a Beta of .61.

What does that number mean?

When evaluating a Beta you should first look at whether it's positive or negative. Beta is a measure of how much the stock moves with respect to some index, or with respect to the market. A positive Beta means the stock tends to move in the same direction as the market, a negative Beta means the stock tends to move in the opposite direction as the market. So a Beta of .61 means that when the market goes up(down) XOM tends to go up(down).

A negative Beta means that when the market goes up(down) the stock tends to go down(up).

A zero Beta means the stock doesn't move much.

The next thing to consider when evaluating a Beta is whether it's above or below one (or negative one). A Beta greater than 1 means that when the market goes up that stock goes up even more dramatically. Less than 1 (but greater than 0) means that when the market goes up so does the stock but not as dramatically.

The bigger the Beta the more the volatility.

XOM, with a Beta of .61 would appear to be a rather stable stock that tends to follow the market but lag behind slightly.