How to Calculate the Beta Coefficient for a Single Stock
Mar 22, · How to Calculate the Beta Coefficient. To calculate the Beta of a stock or portfolio, divide the covariance of the excess asset returns and excess market returns by the variance of the excess market returns over the risk-free rate of return: Advantages of using Beta Coefficient. The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark, divided by the variance of the return of the benchmark over a certain period.
Beta is a measure of the volatility of the stock as compared to the overall stock market. We can calculate beta using three formulas —. To calculate the covariancewe must know the return of the stock and also the return of the market, which is taken as a benchmark value.
We must also know the variance of the market return. We can also calculate Beta by how to make a numbers board for football the slope function in excel. Beta can also be calculated using the correlation method. Then we need to sort how to find beta coefficient dates of the stock prices and adjusted closing prices in ascending order of dates. Step 3: Then, prepare the beta coefficient excel sheet, as shown below.
We put both the data in one sheet. In this case, we need to use the two formulas formulas of variance and covariance in excelas shown below:. Using the variance-covariance method, we get the Beta as 0. XYZ has a standard deviation of returns of We will see each of the beta coefficient calculations. Based on data over the past three years, take the data from Yahoo finance and calculate Beta as below Based on data over the past three years, take the data from Yahoo finance and calculate Beta as below:.
Beta indicates whether an investment is more volatile or less volatile. Beta, which has a value of 1, indicates that it exactly moves in accordance with the market value. A higher beta indicates that the stock is riskier, and a lower beta indicates that the stock is less volatile as compared to the market.
Mostly Betas generally fall between the values of range 1. The beta of the market is equal to 1. If a stock is benchmarked against the market and has a beta value greater than 1 for example, we consider it as 1. Beta is used in the formulae of capital asset pricing model CAPMwhich is used to calculate the expected return of an asset based on the value of beta and expected market return.
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Sep 11, · In the first column, insert the date range to be used to calculate the beta. In the second column add the corresponding closing price data for the stock in question, and in column three, insert the. Oct 25, · There are then two ways to determine beta. The first is to use the formula for beta, which is calculated as the covariance between the return (r a) of the stock and the return (r b) of the . Mar 01, · One classic method for calculating the Beta Coefficient or ? is to divide the Variance of the market return by the Covariance of the market return. Here is a classic formula for calculating the Beta Coefficient: ? =Variance of Market Return ? Covariance of Market Return with Stock Return.
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Measure content performance. Develop and improve products. List of Partners vendors. Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall market. The overall market has a beta of 1. A stock that swings more than the market over time has a beta greater than 1. If a stock moves less than the market, the stock's beta is less than 1. High-beta stocks tend to be riskier but provide the potential for higher returns.
Low-beta stocks pose less risk but typically yield lower returns. As a result, beta is often used as a risk-reward measure, meaning it helps investors determine how much risk they are willing to take to achieve the return for taking on that risk.
A stock's price variability is important to consider when assessing risk. If you think of risk as the possibility of a stock losing its value, beta is useful as a proxy for risk. To calculate the beta of a security, the covariance between the return of the security and the return of the market must be known, as well as the variance of the market returns. Covariance measures how two stocks move together. A positive covariance means the stocks tend to move together when their prices go up or down.
A negative covariance means the stocks move opposite of each other. Variance , on the other hand, refers to how far a stock moves relative to its mean. For example, variance is used in measuring the volatility of an individual stock's price over time. Covariance is used to measure the correlation in price moves of two different stocks.
The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark , divided by the variance of the return of the benchmark over a certain period. Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation of the security's returns and the benchmark's returns. AAPL has a standard deviation of returns of Betas vary across companies and sectors.
Many utility stocks , for example, have a beta of less than 1. Conversely, many high-tech stocks on the Nasdaq have a beta greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
It's important that investors distinguish between short-term risks where beta and price volatility are useful and long-term risks where big picture fundamental risk factors are more prevalent. Investors looking for low-risk investments might gravitate to low beta stocks, meaning their prices won't fall as much as the overall market during downturns.
However, those same stocks won't rise as much as the overall market during upswings. By calculating and comparing betas, investors can determine their optimal risk-reward ratio for their portfolio. Risk Management. Investing Essentials. Fundamental Analysis. Hedge Funds Investing. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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Related Terms Beta Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. It is used in the capital asset pricing model. Volatility Volatility measures how much the price of a security, derivative, or index fluctuates. Excess Returns Excess returns are returns achieved above and beyond the return of a proxy. Excess returns will depend on a designated investment return comparison for analysis.
Covariance Covariance is an evaluation of the directional relationship between the returns of two assets. Country Risk Premium CRP Country risk premium CRP is the additional return or premium demanded by investors to compensate them for the higher risk of investing overseas. Investopedia is part of the Dotdash publishing family.