Beta
A measure of how much a fund moves in response to its benchmark. Beta of 1 means the fund moves one-for-one with the benchmark; beta of 0.7 means it moves 30% less.
Beta is the slope of the regression of a fund's returns on its benchmark's returns: fund return = α + β × benchmark return + ε. A beta of 1.0 means the fund moves on average one-for-one with the benchmark; a beta of 0.7 means the fund moves 30% less than the benchmark in either direction; a beta of 1.3 means the fund moves 30% more than the benchmark in either direction.
Beta is widely used to characterise a fund's effective market exposure. Defensive equity funds (utilities, consumer staples, healthcare-tilted mandates) typically have beta less than 1 to the broad equity market; cyclically tilted or concentrated growth funds typically have beta greater than 1.
Beta is a statistical past-fit, not a fixed property of the fund. The same manager's beta can change materially with portfolio changes or with the period over which it is measured. The choice of benchmark also matters: a NZ-equity fund will have a near-1 beta to the S&P/NZX 50 but a quite different beta to a global equity benchmark.
Related terms
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alpha
Alpha
A fund's return in excess of what its benchmark exposure would predict, after adjusting for the beta of the strategy. Often shorthand for "skill-driven excess return".
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tracking-error
Tracking error
The standard deviation of a fund's return differences against its benchmark. For an index fund, low tracking error means tight replication; for an active fund, high tracking error means more active risk relative to benchmark.
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index-vs-active
Index fund vs active fund
An index fund mechanically tracks a published market index. An active fund's manager makes discretionary buy/sell decisions trying to beat or differ from a benchmark.