Beta

Beta tells you how sensitive a fund is to its market. A beta of 1 moves in line with the market, above 1 means bigger swings in both directions, and below 1 means smaller swings.

How to read the number

Beta compares a fund’s movement with its benchmark market. A beta of 1 means the fund tends to rise and fall roughly in step with the market. A beta of 1.2 means it swings about 20% more: when the market rises 10%, the fund tends to rise about 12%, and it falls harder too. A beta of 0.8 means the reverse, smaller moves than the market in both directions. It is a measure of sensitivity, not of good or bad.

What it does and does not capture

Beta measures only the part of a fund’s movement that tracks the market. It says nothing about returns, and unlike standard deviation, which captures all the volatility, beta ignores the swings specific to the fund’s own holdings. So the two are complementary: standard deviation tells you total bumpiness, beta tells you how much of the ride comes from the market itself.

Using it sensibly

A higher-beta fund will likely amplify both market rises and falls, so it suits someone with a long horizon and the nerves for sharper drops, and is less suitable for money needed soon. Pair it with the Sharpe ratio and the fund’s mandate rather than reading it alone. All these figures look backward, so treat beta as a clue to character, not a forecast.