Updated on October 27th, 2020 by Bob Ciura
Spreadsheet data updated daily, constituents updated quarterly
In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price in both directions. That volatility can increase the risk in an individual’s stock portfolio relative to the broader market.
The volatility of a security or portfolio against a benchmark – is called Beta. In short, Beta is measured via a formula that calculates the price risk of a security or portfolio against a benchmark, which is typically the broader market as measured by the S&P 500 Index.
It is helpful in understanding the overall price risk level for investors during market downturns in particular.
High Beta stocks are not a sure bet during bull markets to outperform, so investors should be judicious when adding high Beta stocks to a portfolio, as the weight of the evidence suggests they are more likely to underperform during periods of market weakness.
However, for those investors interested in adding a bit more risk to their portfolio, we’ve put together a list to help investors find the best high beta stocks.
You can download your free High Beta stocks list (along with relevant financial metrics such as dividend yields and price-to-earnings ratios) by clicking on the link below:
This article will provide an overview of Beta. In addition, we will discuss how to calculate Beta, incorporating Beta into the Capital Asset Pricing Model, and provide analysis on the top 5 highest-Beta stocks in our coverage database.
The table of contents below provides for easy navigation:
Table of Contents
- High Beta Stocks Versus Low Beta Stocks
- How To Calculate Beta
- Beta & The Capital Asset Pricing Model (CAPM)
- Analysis On The 5 Highest-Beta Stocks
- Final Thoughts
High Beta Stocks Versus Low Beta
Here’s how to read stock betas:
- A beta of 1.0 means the stock moves equally with the S&P 500
- A beta of 2.0 means the stock moves twice as much as the S&P 500
- A beta of 0.0 means the stocks moves don’t correlate with the S&P 500
- A beta of -1.0 means the stock moves precisely opposite the S&P 500
The higher the Beta value, the more volatility the stock or portfolio should exhibit against the benchmark. This can be beneficial for those investors that prefer to take a bit more risk in the market as stocks that are more volatile – that is, those with higher Beta values – should outperform the benchmark (in theory) during bull markets.
However, Beta works both ways and can certainly lead to larger drawdowns during periods of market weakness. Importantly, Beta simply measures the size of the moves a security makes.
Intuitively, it would make sense that high Beta stocks would outperform during bull markets. After all, these stocks should be achieving more than the benchmark’s returns given their high Beta values. While this can be true over short periods of time – particularly the strongest parts of the bull market – the high Beta names are generally the first to be sold heavily by investors.
This excellent paper from the CFA Institute theorizes that this is true because investors are able to use leverage to bid up momentum names with high Beta values and thus, on average, these stocks have lower prospective returns at any given time. In addition, leveraged positions are among the first to be sold by investors during weak periods because of margin requirements or other financing concerns that come up during bear markets.
In other words, while high Beta names may outperform while the market is strong, as signs of weakness begin to show, high Beta names are the first to be sold and generally, much more strongly than the benchmark.
Indeed, evidence suggests that during good years for the market, high Beta names capture 138% of the market’s total returns. In other words, if the market returned 10% in a year, high Beta names would, on average, produce 13.8% returns. However, during down years, high Beta names capture 243% of the market’s returns.
In a similar example, if the market lost 10% during a year, the group of high Beta names would have returned -24.3%. Given this relatively small outperformance during good times and vast underperformance during weak periods, it is easy to see why we prefer low Beta stocks.
While low Beta stocks aren’t a vaccine against downturns in the market, it is much easier to make the case over the long run for low Beta stocks versus high Beta given how each group performs during bull and bear markets.
How To Calculate Beta
The formula to calculate a security’s Beta is fairly straightforward. The result, expressed as a number, shows the security’s tendency to move with the benchmark.
In other words, a Beta value of 1.00 means that the security in question should move virtually in lockstep with the benchmark (as discussed briefly in the introduction of this article). A Beta of 2.00 means moves should be twice as large in magnitude while a negative Beta means that returns in the security and benchmark are negatively correlated; these securities tend to move in the opposite direction from the benchmark.
This sort of security would be helpful to mitigate broad market weakness in one’s portfolio as negatively correlated returns would suggest the security in question would rise while the market falls.
For those investors seeking high Beta, stocks with values in excess of 1.3 would be the ones to seek out. These securities would offer investors at least 1.3X the market’s returns for any given period.
Here’s a look at the formula to compute Beta:
The numerator is the covariance of the asset in question while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute.
Here’s an example of the data you’ll need to calculate Beta:
- Risk-free rate (typically Treasuries at least two years out)
- Your asset’s rate of return over some period (typically one year to five years)
- Your benchmark’s rate of return over the same period as the asset
To show how to use these variables to do the calculation of Beta, we’ll assume a risk-free rate of 2%, our stock’s rate of return of 14% and the benchmark’s rate of return of 8%.
You start by subtracting the risk-free rate of return from both the security in question and the benchmark. In this case, our asset’s rate of return net of the risk-free rate would be 12% (14% – 2%). The same calculation for the benchmark would yield 6% (8% – 2%).
These two numbers – 12% and 6%, respectively – are the numerator and denominator for the Beta formula. Twelve divided by six yields a value of 2.00, and that is the Beta for this hypothetical security. On average, we’d expect an asset with this Beta value to be 200% as volatile as the benchmark.
Thinking about it another way, this asset should be about twice as volatile than the benchmark while still having its expected returns correlated in the same direction. That is, returns would be correlated with the market’s overall direction, but would return double what the market did during the period. This would be an example of a very high Beta stock and would offer a significantly higher risk profile than an average or low Beta stock.
Beta & The Capital Asset Pricing Model
The Capital Asset Pricing Model, or CAPM, is a common investing formula that utilizes the Beta calculation to account for the time value of money as well as the risk-adjusted returns expected for a particular asset. Beta is an essential component of the CAPM because without it, riskier securities would appear more favorable to prospective investors as their risk wouldn’t be accounted for in the calculation.
The CAPM formula is as follows:
The variables are defined as:
- ERi = Expected return of investment
- Rf = Risk-free rate
- βi = Beta of the investment
- ERm = Expected return of market
The risk-free rate is the same as in the Beta formula, while the Beta that you’ve already calculated is simply placed into the CAPM formula. The expected return of the market (or benchmark) is placed into the parentheses with the market risk premium, which is also from the Beta formula. This is the expected benchmark’s return minus the risk-free rate.
To continue our example, here is how the CAPM actually works:
ER = 2% + 2.00(8% – 2%)
In this case, our security has an expected return of 14% against an expected benchmark return of 8%. In theory, this security should vastly outperform the market to the upside but keep in mind that during downturns, the security would suffer significantly larger losses than the benchmark. Indeed, if we changed the expected return of the market to -8% instead of +8%, the same equation yields expected returns for our hypothetical security of -18%.
This security would theoretically achieve stronger returns to the upside but certainly much larger losses on the downside, highlighting the risk of high Beta names during anything but strong bull markets. While the CAPM certainly isn’t perfect, it is relatively easy to calculate and gives investors a means of comparison between two investment alternatives.
Analysis On The 5 Highest-Beta Stocks
Now, we’ll take a look at the 5 stocks with the highest Beta scores (in ascending order from lowest to highest).
Bank of America (BAC)
Bank of America provides traditional banking services,as well as non-banking financial services to customers all over the world. Its operations include Consumer Banking, Wealth & Investment Management and Global Banking & Markets. Bank of America was founded in 1904, is headquartered in Charlotte, NC, and currently trades with a market capitalization just above $200 billion, making it a mega-cap stock. You can see all 20 mega-cap stocks here.
Bank of America reported third-quarter earnings on October 14th, with revenue coming in under expectations, while earnings were slightly better. Total revenue was off -11% year-over-year to $20.3 billion as the company continues to grapple with an unprecedented economic slowdown that impacted credit quality across many different lines of business. Net interest income was down -17% year-over-year to just $10.1 billion, which was negatively impacted by lower interest rates. Non-interest income fared better, but still fell -4% year-over-year to $10.2 billion. Lower consumer fees were largely offset by strong trading and investment banking results.
Non-interest expense was down -5% to $14.4 billion as COVID costs and higher litigation expense were more than offset by the absence of an impairment charge that occurred in the year-ago period. Loan and lease balances were up 3% year-over-year to $950 billion, while deposits soared 23% to $1.7 trillion, putting the bank’s loan-to-deposit ratio at just 56%. Book value per share rose 5% to $28.33, while tangible book value also added 5% year-over-year to $20.23 per share.
The 5-year Beta score is 1.45.
Morgan Stanley (MS)
Morgan Stanley is a global financial institution with a market cap of $88 billion. It operates three core segments: Institutional Securities, Wealth Management, and Investment Management.
The company recently reported third-quarter financial results on October 15th. Total revenue increased 16% year-over-year. Revenue increased in all three segments. The Common Equity Tier 1 ratio was 17.3% for the quarter.
The 5-year Beta score is 1.47.
American Express (AXP)
American Express is a credit card company that operates the following business units: US Card Services, International Consumer and Network Services, Global Commercial Services,and Global Merchant Services. American Express was founded in 1850, and is headquartered in New York, NY.
American Express reported its third-quarter earnings results on October23. The company generated revenues of $8.7 billion during the quarter, which was 20% less than during the previous year’s quarter. The revenue decline was based on lower transaction volumes, caused by the drop in consumer and business spending that was the result of the ongoing coronavirus crisis.
Revenues improved by double-digits compared to the second quarter of 2020. Earnings-per-share of $1.30 slightly missed analyst estimates. American Express is preparing for the impact of the crisis through cost-cutting, the company has also increased its provisions for credit losses by another $700 million during the third quarter. 2020 will be a down year for American Express, but we forecast a recovery over the coming years.
The 5-year Beta score is 1.50.
Citigroup is a global juggernaut in credit cards, commercial banking, trading and a variety of other financial activities. It has thousands of branches, produces $74 billion in annual revenue, and has a market capitalization of $90 billion.
Citigroup reported third quarter earnings on October 13th, with results coming in ahead of expectations on the top and bottom lines. Revenue was down -7% to $17.3 billion in Q3, primarily driven by lower revenue from the bank’s global consumer business, which was partially offset by strong results in fixed income, investment banking, equity markets, and private banking.
Cost of credit came to $2.3 billion, up 8%, largely reflecting an increase in the allowance for credit losses. The allowance for credit losses came to $26.4 billion, or 4% of loans, more than doubling from $12.5 billion and 1.82%, respectively, in last year’s Q3.
Total non-accrual assets were up 40% from last year, although losses in consumer loans fell -9%, while commercial non-accruals soared 94% year-over-year. End of period loans were $667 billion, down -4% year-over-year, while deposits ended the quarter at $1.3 trillion, up 16% year-over-year. Citi’s loan-to-deposit ratio is nearing just 50%.
The stock has a 5-year Beta value of 1.63.
The Boeing Company (BA)
The Boeing Company is the world’s largest commercial jet manufacturer,and second largest military weapons producer. The company has been in business since 1916. In the last 100+ years, the aerospace and defense company has gone from making canvas and wood airplanes to producing today’s advanced planes, with Boeing helping to drive some of that change. It is composed of three divisions: Commercial Airplanes, Defense, Space & Security and Global Services. The company, with normalized annual sales of about $90 billion.
Boeing reported earnings results for the second quarter on 7/29/2020. Adjusted earnings-per-share of -$4.79, which missed estimates by $2.26. EPS results compared to -$5.82 for the second quarter of 2019. Revenue declined 25% to $11.8 billion, $1.1 billion lower than expected. Boeing has also suspended its dividend due to the coronavirus crisis.
The 5-year Beta score is 1.77.
Investors must take risk into account when selecting from prospective investments. After all, if two securities are otherwise similar in terms of expected returns but one offers a much lower Beta, the investor would do well to select the low Beta security as it would offer better risk-adjusted returns.
Using Beta can help investors determine which securities will produce more volatility than the broader market, such as the ones listed here. The five stocks we’ve looked at offer investors high Beta scores along with very strong prospective returns. For investors who want to take some additional risk in their portfolio, these names and others like them in our list of the 100 best high Beta stocks can help determine what to look for when selecting a high Beta stock to buy.