When would a company have a beta less than 1?

A company would have a beta less than 1 when it is less affected by market fluctuations. Beta is a measure of a stock's volatility in relation to the overall market. A beta of 1 indicates that the stock's price moves with the market, while a beta less than 1 suggests that the stock is less volatile and does not swing as widely with market movements. Such companies are typically in industries that provide essential goods or services, where demand remains stable regardless of economic conditions.

This characteristic allows these companies to maintain more consistent earnings, making them less sensitive to market changes compared to companies with a beta greater than 1. Factors such as high operating leverage or volatility in earnings can lead to a higher beta, as they indicate greater susceptibility to the economic cycle, which contrasts with the stability implied by a lower beta. Likewise, companies operating in recession-sensitive sectors often have higher betas due to their susceptibility to economic downturns, contrary to the situation of companies with low betas.