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Rick

Beta

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Beta

The degree of sensitivity that a particular stock has to the broader market. The greater a stock's price rises during market rallies and falls during market drops, the greater a stock's beta. If a stock tends to drop when the market rises, and vice versa, its beta will be negative.

This is a daily chart of IBM, and shows a positive beta as compared to the S&P 500. The first thing to notice is that as the S&P 500 goes up, so does IBM's price during this time period. As the S&P 500 goes down, IBM's does also.

What makes this a positive beta over the time period is that the gap between the two prices widens as the S&P goes up. A positive beta indicates that with a 5% increase in the S&P 500, the price of IBM will increase by more than 5%. In late September as the prices go down, notice how the gap narrows. The reason is that beta works both ways. A 5% drop in the price of the S&P 500 should produce a greater that 5% drop in the price of IBM. With a true beta, if the price of the S&P 500 was to drop to its price level in late August, the price of IBM should be dip to 113, its price level in late August.

Below is an example of a negative beta for the given period.

With a negative beta, a climb in the price of an index should correlate with a drop in the price of the stock, and vice versa. In this daily chart of Chevron (using the same period of time as in the IBM example), the price of Chevron rises when the S&P 500 is essentially flat, and begins to drop and stagnate as the S&P 500 increases towards the end of the period shown.

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