What is Beta?

Beta

Dictionary Definition

Beta is a factor used to measure systematic risk. Systematic risk is the uncertainty of future returns owing to the sensitivity of the return on the subject investment to movements in the returns for a composite measure of marketable investments.

Plain English

Beta refers to the volatility or riskiness of a stock relative to all other stocks in the market.

Why it Matters to You

This is used in calculating the WACC.  Generally, we are using public company betas, since we are not able to calculate the company’s specific beta because the information is not available.  There are times when an industry is very fragmented and/or no large, public companies exist.  In that case we omit beta from the WACC calculation, since there is no way to calculate a beta.