Beta
A stock's sensitivity to moves in a benchmark index — typically the S&P 500.
Beta is the slope from regressing a stock's excess returns against a benchmark's excess returns: `β = Cov(Rᵢ, R_m) / Var(R_m)`. A beta of 1.0 means the stock moves 1% for every 1% move in the market; 1.5 means it amplifies 50%; negative beta means it moves against the market.
Why it matters. Beta is the simplest measure of *systematic* risk — the risk you can't diversify away. The CAPM uses it to set required return: `r = r_f + β × (r_m − r_f)`. In a DCF or EPV, beta plugs directly into the cost of equity that forms part of the discount rate.
Pitfalls. Beta estimated over 1–2 years can be unstable, especially for illiquid names. It assumes a linear market relationship, which breaks in crashes where correlations converge to 1.
See it applied
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