Beta

A measure of relative volatility of the price of the instrument (a fund´s share price or unit investment trust´s unit price) to the overall performance of the market (frequently Standard & Poor´s 500® Index). The returns on a security with a beta of one will move in line with the market. Securities with betas higher than 1.0 have been, and are expected to be, more volatile than the S&P; securities with betas lower than 1.0 have been, and are expected to be, less volatile than the S&P.
When establishing the cost of equity, the beta factor is used to calculate the market´s expected rate of return over and above a risk-free investment when it provides its funds to company. Betas are additive, hence the beta of a portfolio is the weighted average of all the individual betas in a portfolio. The capital asset pricing model states that unique or unsystematic risk can be diversified away so that only systematic risk commands a risk premium.