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Beta Formula:
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Beta (β) measures a stock's volatility relative to the overall market. It indicates how much a stock's price tends to move compared to market movements. A beta of 1 means the stock moves with the market, while a beta greater than 1 indicates higher volatility, and less than 1 indicates lower volatility.
The calculator uses the beta formula:
Where:
Explanation: The formula calculates how much a stock's returns move in relation to market returns, providing a measure of systematic risk.
Details: Beta is crucial for portfolio management, risk assessment, and capital asset pricing model (CAPM) calculations. It helps investors understand a stock's risk profile and expected returns relative to market movements.
Tips: Enter covariance and variance values (both unitless). Variance must be greater than zero. The calculator will compute the beta coefficient.
Q1: What does a beta of 1.5 mean?
A: A beta of 1.5 means the stock is 50% more volatile than the market. If the market moves 10%, the stock tends to move 15%.
Q2: Can beta be negative?
A: Yes, negative beta indicates the stock moves inversely to the market, which is rare but possible for some defensive stocks or inverse ETFs.
Q3: How is covariance calculated?
A: Covariance measures how two variables move together. It's calculated as the average of the product of deviations from their respective means.
Q4: What time period should be used for calculations?
A: Typically, 3-5 years of monthly returns are used, but the period can vary based on investment horizon and data availability.
Q5: Are there limitations to beta?
A: Beta assumes past volatility predicts future risk, doesn't account for new information, and may not be reliable for stocks with short trading histories.