How to Calculate Stock Beta

Beta Formula:

\[ \beta = \frac{Correlation \times \sigma_{stock}}{\sigma_{market}} \]

Correlation:

(decimal)

Standard Deviation (Stock):

(decimal)

Standard Deviation (Market):

(decimal)

Stock Beta (β):

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1. What is Stock Beta?

Beta (β) measures a stock's volatility relative to the overall market. A beta of 1 indicates the stock moves with the market, while a beta greater than 1 means the stock is more volatile than the market, and less than 1 means it's less volatile.

2. How Does the Calculator Work?

The calculator uses the beta formula:

\[ \beta = \frac{Correlation \times \sigma_{stock}}{\sigma_{market}} \]

Where:

\( Correlation \) — Correlation coefficient between stock and market returns (-1 to 1)
\( \sigma_{stock} \) — Standard deviation of stock returns
\( \sigma_{market} \) — Standard deviation of market returns

Explanation: Beta compares how much a stock's returns move relative to market returns, adjusted for their relative volatility.

3. Importance of Beta Calculation

Details: Beta is crucial for the Capital Asset Pricing Model (CAPM), portfolio construction, and understanding a stock's risk profile. It helps investors assess systematic risk that can't be diversified away.

4. Using the Calculator

Tips: Enter the correlation coefficient (between -1 and 1), standard deviation of stock returns, and standard deviation of market returns. All values must be valid (market SD > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is a good beta value?
A: There's no "good" or "bad" beta - it depends on investment strategy. Conservative investors may prefer low beta stocks, while aggressive investors may seek high beta stocks.

Q2: How is correlation calculated?
A: Correlation is typically calculated using historical returns data: \( \rho = \frac{Cov(R_{stock}, R_{market})}{\sigma_{stock} \times \sigma_{market}} \)

Q3: What time period should be used?
A: Typically 3-5 years of monthly returns, but depends on investment horizon. Shorter periods may capture recent trends but be more volatile.

Q4: Can beta be negative?
A: Yes, negative beta means the stock moves inversely to the market (rare, but possible with certain hedging instruments or gold stocks).

Q5: What are beta's limitations?
A: Beta assumes normal return distributions and constant volatility, which may not hold in reality. It also only measures systematic risk, not total risk.