Deep Dive: What Is Beta — How to Measure a Stock's Volatility Relative to the Market and Use It in Your Portfolio
10 min read
Share:
Key Takeaways
Beta measures how much a stock moves relative to the S&P 500 — a beta of 1.5 means the stock historically moves 1.5 times as much as the market in either direction.
Current betas range from 0.23 (Lockheed Martin) to 2.31 (NVIDIA), meaning a 10% market decline could mean anywhere from a 2.3% to a 23.1% drop depending on which stock you hold.
Low-beta stocks (JNJ, KO, PG below 0.4) protect capital in downturns, while high-beta stocks (NVDA, AMD, TSLA above 1.8) amplify gains in bull markets — your portfolio's weighted average beta should match your risk tolerance.
Beta only captures market-related risk and doesn't account for company-specific events like earnings surprises or regulatory decisions — diversification across 25-30 stocks is still essential.
Calculate your portfolio beta by weighting each holding's beta by its allocation — aim for 1.2-1.5 if investing long-term for growth, or 0.6-0.8 if preserving capital near retirement.
Every stock moves differently when the market rises or falls. Some amplify every swing — doubling the market's gains on good days and doubling its losses on bad ones. Others barely budge, grinding steadily higher while the indexes whipsaw around them. The metric that captures this behavior is called beta, and understanding it is one of the most practical things an investor can do before buying a single share.
Beta measures a stock's sensitivity to market movements. A beta of 1.0 means the stock tends to move in lockstep with the S&P 500. Above 1.0 and the stock amplifies market moves; below 1.0 and it dampens them. With the VIX volatility index recently fluctuating between 17.65 and 21.20 in February 2026 — reflecting moderate but persistent uncertainty around geopolitical tensions and Federal Reserve policy — understanding how individual stocks respond to market-wide volatility has never been more relevant.
This guide breaks down what beta actually measures, how it's calculated, what the numbers mean in practice, and — most importantly — how to use beta when constructing a portfolio that matches your risk tolerance. We'll use real beta values from stocks across every major sector to show how this single number reveals surprisingly different risk profiles hiding behind similar-looking stock prices.
What Beta Measures and Why It Matters
How Beta Is Calculated — The Math Behind the Number
Beta Values Across Sectors — What Real Numbers Tell You
Theory is useful, but real beta values reveal how dramatically risk profiles differ across sectors. Here are current beta values for well-known stocks spanning every major sector of the S&P 500:
Stock Beta Values by Sector (February 2026)
The pattern is striking. At the low end, Lockheed Martin (LMT) has a beta of just 0.23 — defense spending is largely insulated from economic cycles because government contracts don't disappear during recessions. Johnson & Johnson (0.35), ExxonMobil (0.36), Coca-Cola (0.36), and Procter & Gamble (0.38) cluster together as classic defensive stocks. People keep buying medicine, gasoline, soda, and toothpaste regardless of what the S&P 500 does.
In the middle, JPMorgan Chase (1.05), Microsoft (1.08), and Apple (1.11) sit near the market's beta of 1.0 — large enough and diversified enough to roughly track the broader index. Boeing (1.14) and Meta (1.28) show moderate amplification, reflecting their exposure to cyclical advertising spending and aerospace orders.
At the high end, Tesla (1.89), AMD (1.95), and NVIDIA (2.31) are volatility amplifiers. NVIDIA's beta of 2.31 means that a 1% drop in the S&P 500 historically corresponds to a roughly 2.3% drop in NVIDIA shares. During the market's 10% correction in 2025, NVIDIA fell more than 20% — almost exactly what its beta would predict.
How to Use Beta When Building Your Portfolio
The Limitations of Beta — What It Doesn't Tell You
VIX Volatility Index — February 2026
Conclusion
Beta is one of the most practical risk metrics available to individual investors — not because it perfectly predicts the future, but because it gives you a concrete, quantifiable way to think about how your portfolio will behave when markets move. A portfolio full of 2.0+ beta stocks will feel exhilarating in bull markets and devastating in bear markets. A portfolio of 0.3-0.5 beta stocks will feel boring in rallies but provide crucial stability when the S&P 500 is falling 20%.
The most effective use of beta is at the portfolio level, not the stock level. Calculate your portfolio's weighted average beta and ask whether it matches your time horizon and risk tolerance. If you're 30 and investing for retirement, a portfolio beta of 1.2-1.5 captures the long-term equity premium. If you're 60 and approaching retirement, a portfolio beta of 0.6-0.8 preserves capital while still participating in market growth.
Ultimately, beta answers a simple but essential question: how much market risk are you actually taking? In a February 2026 environment where the VIX is oscillating around 20 and geopolitical uncertainty persists, knowing the answer to that question — stock by stock and portfolio-wide — separates informed investors from those who only discover their risk tolerance when it's too late to adjust.
Disclaimer: This content is AI-generated for informational purposes only and does not constitute financial advice. Consult qualified professionals before making investment decisions.
Beta quantifies systematic risk — the portion of a stock's volatility that comes from broad market movements rather than company-specific events. When the S&P 500 drops 2% on recession fears or rallies 3% on a surprise rate cut, beta tells you how much a particular stock is likely to move in response.
The concept comes from the Capital Asset Pricing Model (CAPM), developed by William Sharpe in the 1960s, which remains the foundation of modern portfolio theory. CAPM says that a stock's expected return should compensate investors for two things: the time value of money (the risk-free rate) and the additional risk of holding that stock instead of a risk-free Treasury bond. Beta is the multiplier that determines how much extra return you should demand.
The formula is straightforward: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate). If the risk-free rate is 4.0% (roughly where the 10-year Treasury sits in February 2026), the market's expected return is 10%, and a stock has a beta of 1.5, then you'd expect that stock to return about 13% — the 4.0% risk-free rate plus 1.5 times the 6% market risk premium. Higher beta means you're taking on more market risk, so you should expect higher returns to compensate.
Beta matters because it separates the risk you can diversify away (company-specific events like earnings misses or product recalls) from the risk you cannot (recessions, rate changes, geopolitical shocks). You can eliminate company-specific risk by holding 25-30 stocks across different sectors. But you cannot diversify away market risk — and beta tells you exactly how much of it each stock carries.
Beta is calculated by comparing a stock's historical returns to the market's returns over a specific period — typically 5 years of monthly data, though some analysts use 2-3 years of weekly data for faster-moving sectors.
The formula is: Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns). In plain English, you're measuring how much the stock's returns move together with the market's returns, divided by how much the market moves on its own. If the stock consistently moves more than the market in the same direction, beta exceeds 1.0. If it moves less, beta falls below 1.0.
Here's a simplified example. Suppose over five months, the S&P 500 returned +2%, -1%, +3%, -2%, and +1%. If a stock returned +3%, -1.5%, +4.5%, -3%, and +1.5% over those same months, the stock moved 1.5 times as much as the market in each period — giving it a beta of approximately 1.5.
A few important nuances: beta is backward-looking, calculated from historical data. A stock's beta can shift over time as its business model, leverage, or industry dynamics change. The choice of time period and benchmark index also matters — a biotech stock measured against the S&P 500 will have a different beta than the same stock measured against the Nasdaq Composite. Most financial data providers, including the figures used in this article, calculate beta against the S&P 500 using 5 years of monthly returns.
Beta's real value isn't as a stock-picking tool — it's a portfolio construction tool. Here's how to apply it practically.
Match beta to your time horizon. If you're investing for 20+ years (retirement accounts, 529 plans), you can afford higher-beta holdings because time smooths out volatility. A portfolio tilted toward high-beta growth stocks like NVIDIA or Amazon will experience stomach-churning drawdowns, but historically, higher beta has corresponded to higher long-term returns. If you're investing money you'll need within 3-5 years, low-beta stocks like Johnson & Johnson or Procter & Gamble protect capital when markets turn.
Calculate your portfolio's weighted beta. Your portfolio beta is the weighted average of each position's beta. If you hold 50% in an S&P 500 index fund (beta 1.0) and 50% in a basket of utility stocks (beta ~0.7), your portfolio beta is approximately 0.85 — meaning you'd expect about 85% of the market's movement in either direction. You can adjust this dial by shifting allocations between high-beta and low-beta holdings.
Don't confuse beta with total risk. A stock can have a low beta but still be extremely risky. A pharmaceutical company awaiting an FDA decision might have a beta of 0.5 (its price doesn't track the market), but the binary outcome of approval or rejection could move the stock 50% in a day. Beta only captures market-related risk, not company-specific risk. That's why diversification across 25-30 positions matters even within a low-beta portfolio.
Use beta to stress-test. Before buying, ask: "If the S&P 500 drops 20% in a bear market, what happens to this stock?" With NVIDIA's beta of 2.31, a 20% market decline implies a roughly 46% decline in NVIDIA. With Coca-Cola's beta of 0.36, the same market decline implies only a 7% drop. Can you hold through the drawdown without panic selling? If not, your portfolio's beta is too high for your temperament.
Beta is a powerful tool, but it has important blind spots that every investor should understand.
Beta is backward-looking. It's calculated from historical data, typically 5 years of monthly returns. A company that pivots its business model — like Netflix transitioning from DVD rentals to streaming — will have a beta that reflects the old business, not the new one. Conversely, a stable utility company that takes on significant debt for a nuclear plant might see its future volatility diverge sharply from its historical beta.
Beta assumes symmetry. A beta of 1.5 implies the stock moves 1.5x the market in both directions — up and down equally. In reality, many stocks exhibit asymmetric behavior. Bank stocks, for instance, tend to fall much faster than they rise during market stress because financial crises trigger correlated selling and liquidity concerns. The 2008 financial crisis saw bank stocks plunge 80%+ while the S&P 500 fell about 50% — far worse than their pre-crisis betas would have predicted.
Negative beta is rare but real. A negative beta means the stock tends to move opposite to the market. Gold mining stocks and certain inverse ETFs can exhibit negative beta, making them hedging tools during downturns. However, true negative-beta stocks are uncommon in the equity universe — most stocks are positively correlated with the broader market to some degree.
The VIX chart above illustrates why beta matters in the current environment. Even in a relatively calm market, the VIX swung from 17.65 to 21.20 within two weeks — a 20% range. For a stock with a beta of 2.3 like NVIDIA, these VIX fluctuations translate into daily price swings roughly twice as large as the S&P 500's. For Lockheed Martin at 0.23 beta, the same market turbulence barely registers.
Beta changes over time. As companies grow, take on or pay off debt, enter new markets, or shift their revenue mix, their sensitivity to market movements evolves. Tesla's beta has declined from over 2.5 five years ago to 1.89 today as the company has matured from a speculative growth story into a large-cap manufacturer. NVIDIA's beta has increased as AI spending has become more cyclical and macro-sensitive. Always check the most recent beta rather than relying on stale figures.