Dear Mr. Berko:

Dear E.L.:

Beta is the second letter of the Greek alphabet. Many years ago, when the Lord’s dog was just a puppy and I was a small lad, I had a cat called Beta, because it was the second cat in a litter of nine. I taught Beta to swim under water, fetch a pencil and meow on cue. He was literally and figuratively more fun than a barrel of monkeys.

However, in the stock-picking business, the “beta” of a stock is a number that describes the relationship of a stock’s price volatility to the stock market’s. A beta of 0 tells us that the movement of the stock’s price has no relationship to the movement of the stock market. A positive beta tells us that the change in the price of a stock follows the market, and a negative beta suggests that a stock inversely follows the market.

Here’s a simple explanation of the beta concept. A stock with beta of 1 is neither more nor less volatile than the market. So if the market moves up 10 percent, a $20 stock with a beta of 1 is likely to move up 10 percent to $22. If the market drops 10 percent, that $20 stock is likely to fall in price to $18. A beta of 1.5 suggests that if the market moves up or down 10 percent, a $20 stock will probably rise 15 percent to $23 or fall 15 percent to $17.

Now, if a stock has a beta of less than 1, its price change will be less than that of the market. For instance, if a $20 stock has a beta of 0.5 and the market rises 10 percent, that stock will rise to $21. Conversely if the market falls by 10 percent, that stock will drop 1 point to $19. So a beta above 1 suggests that a stock or a portfolio will perform more aggressively than the market, and a beta below 1 suggests that a stock or portfolio will be less volatile than the market.

Johnson & Johnson (JNJ-$63.60) has a beta of 0.6. I think JNJ is a dandy issue to own in a very conservative portfolio for investors who seek low risks. The current dividend yields 3.4 percent; it has been raised in each of the past 20 years. This $62 billion health-care company is a favorite of many long-term growth and income investors.

PepsiCo Inc. (PEP-$66.50) yields 2.9 percent and also has a beta of 0.6. In addition to its beverage business, PEP is also Fritos, Doritos, Cheetos, Ruffles, Aunt Jemima, Rice-A-Roni, Tropicana, Quaker Foods and cereals. This $57 billion revenue company has an enviable record of revenue, earnings and dividend growth, as well as excellent prospects for future growth.

Kellogg Co. (K-$50.80) yields 3.2 percent and has a beta of 0.55. K is the world’s largest cereal manufacturer. Kellogg is in the midst of a huge cost-reduction program that within three years should save the company more than $1 billion annually and add nearly 75 cents per share to earnings by 2014. This is a top-quality equity for investors who want to steer clear of current market volatility.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com