Final answer:
Beta measures a stock's volatility relative to the market, influencing its associated risk and return. A low beta stock is less volatile, suggesting lower risk and typically lower returns, but can be attractive if fundamental analysis indicates strong financial health or growth potential.
Step-by-step explanation:
Beta is a measure of a stock's volatility in relation to the market. A beta of 1 indicates that the stock's price tends to move with the market. A beta less than 1 means that the stock is less volatile than the market, while a beta greater than 1 indicates that the stock is more volatile than the market. Therefore, beta relates to investment risk by showing how much a stock's price might fluctuate compared to the overall market, thereby impacting both risk and potential return.
For low beta stocks, these are typically less susceptible to wide price swings and are considered lower risk, but they also tend to offer lower returns. In the context of the current economic environment, if an investor wants a low beta stock that has a potential for high return, they will look for one that shows solid fundamental analysis metrics, such as a strong balance sheet, steady earnings growth, or potential for market expansion.
When discussing the tradeoff between return and risk, over a sustained period, stocks have an average return higher than bonds, and similarly, bonds outperform savings accounts. This is reflective of the inherent risk and return expectations associated with these investment types—greater risk in stocks is associated with the potential for higher returns.