Betas Can Help Match One’s Equity Holdings With One’s Risk Tolerance
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View from the Observation Deck  
  1. A beta is just one method used for measuring a stock's, or in this case a sector's, expected level of volatility relative to the broader stock market. 
  2. Betas offer investors a starting point for assessing whether or not a particular security or basket of securities potentially fits their risk profile. 
  3. In the chart above, the S&P 500 Index represents the broader market, and is assigned a beta value of 1.00.
  4. Those sectors in the chart with a beta of less than 1.00 are considered to be less risky than the S&P 500 Index, while those with a beta above 1.00 are considered riskier than the broader market.
  5. Beta values change over time. The S&P 500 Information Technology Index currently has a beta of 1.01, compared to 1.28 at the close of March 2000, the month in which the internet bubble burst, according to Bloomberg.
  6. Monitoring key fundamentals of the market such as betas, price-to-earnings ratios and earnings estimates can help an investor adhere to their risk tolerance level as well as potentially exploit opportunities in the market, in our opinion.  
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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Posted on Tuesday, November 24, 2020 @ 12:52 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.