In recent months investors and traders often heard the term “volatility.” Volatility is something investors hear in the news during a downturn in the broader market or if stocks are simply getting a beating due to the current inflationary environment, interest rate decisions, or even the latest debt ceiling worries. But did you know that “volatility” isn’t just a signal for impending losses or danger in the market but also a way for investors to manage risk and build their long-term portfolios? In finance, investors read about volatility being a proxy for risk or what may call systematic risk; as portfolios become more volatile, they tend to be looked at as riskier. Beta allows investors to quantify the price risk of a security or portfolio against its benchmark using its volatility, which is typically the broader market like the S&P 500. So in general, beta tells investors how a stock or portfolio would move by the moves of its benchmark.
