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Beta Formula:
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Beta (β) is a measure of a stock's volatility in relation to the overall market. It indicates how much the price of a specific security moves in response to market movements. A beta of 1 means the security's price moves exactly with the market.
The calculator uses the beta formula:
Where:
Explanation: Beta compares the covariance of the asset's returns with the market's returns to the variance of the market's returns.
Details: Beta is crucial for portfolio management, risk assessment, and capital asset pricing model (CAPM) calculations. It helps investors understand the systematic risk of an investment.
Tips: Enter the covariance between the asset and market, and the variance of the market. Both values should be in the same units (typically squared percentage points for returns).
Q1: What does a beta less than 1 mean?
A: A beta less than 1 indicates the asset is less volatile than the market. For example, a beta of 0.8 means the asset moves 80% as much as the market.
Q2: What does a beta greater than 1 mean?
A: A beta greater than 1 indicates the asset is more volatile than the market. For example, a beta of 1.2 means the asset moves 20% more than the market.
Q3: Can beta be negative?
A: Yes, negative beta indicates the asset moves in the opposite direction of the market. This is rare but can occur with certain inverse ETFs or gold.
Q4: How is beta used in CAPM?
A: In the Capital Asset Pricing Model, beta is used to calculate the expected return of an asset: Expected Return = Risk-Free Rate + β × (Market Return - Risk-Free Rate).
Q5: What are the limitations of beta?
A: Beta is based on historical data and may not predict future volatility. It also assumes normal market conditions and may not account for extreme market events.