Basic Points

• Beta is a metric that can help us to understand the behavior of a stock or fund’s movement in comparison to a baseline. 
• Usually, that baseline is the S&P 500, which is the primary index of stocks for large US companies. 
• If the correlation between the security and its baseline is positive, then beta is positive. 
• And if the percentage range of the asset is greater than that of the baseline, then beta will be greater than one. 
• With these guidelines in mind, beta is a useful way to identify the relative range or the correlation of a security to an index. 

Intermediate: Using Beta for Analysis

When it is said that a portfolio or a fund is high beta, then the general implication is that leverage is being used, and therefore its success is at the mercy of the performance of the baseline index. 

What this means is that whenever leveraged betas are the driving element of a portfolio, then it is going to be highly reliant on path-dependent luck, absent strong intervention and dynamic hedging. Many high-beta strategies might seem safe because they have excellent and steady performance in a market regime which suits them. However, these same strategies can suffer greatly if the market direction reverses and makes them decisively wrong about direction.

Betas can also be used to weight a portfolio. Some brokers will have beta-adjusted deltas automatically, such as Interactive Brokers’ SPX Delta metric being beta-adjusted. What this means is that if, say, so much of a stock is said to have 5 SPX delta, then based on average percentage moves and how it correlates, it would be worth about 50 shares of SPY (in terms of directional risk).

Vega (changes in implied volatility with respect to changes in the option price) is also sometimes beta-weighted, but this is less common. The idea of this would be that a high vega weighting shows that it tends to operate in a wider range than SPY. By normalizing the vega with betas, then sharp moves from typically-volatile products could be better compared to normal moves in SPY.

And in terms of forecasting realized volatility (standard deviation measurements based on historical data), sometimes beta is multiplied against the VIX. The idea is that if options are pricing in a move on a particular security, that we can better understand what kind of move is normal for that security by adjusting the volatility of SPY to that of the security by using beta as a multiplier.