Beta Formula:
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Beta (β) measures a stock's volatility relative to the overall market. It's a key component in the Capital Asset Pricing Model (CAPM) and helps investors understand the systematic risk of an investment compared to the market as a whole.
The calculator uses the Beta formula:
Where:
Explanation: Beta can be calculated either as the covariance between stock and market returns divided by the variance of market returns, or equivalently as the correlation multiplied by the ratio of standard deviations.
Details: Beta is crucial for portfolio management, risk assessment, and determining expected returns. A beta of 1 means the stock moves with the market, <1 means less volatile, and >1 means more volatile than the market.
Tips: Enter correlation (-1 to 1), standard deviation of stock returns (≥0), and standard deviation of market returns (>0). All values must be valid decimal numbers.
Q1: What does a negative beta mean?
A: A negative beta indicates the stock moves inversely to the market, which is rare but possible for certain defensive stocks or inverse ETFs.
Q2: What time period should be used for calculations?
A: Typically 3-5 years of monthly returns are used, but this depends on your analysis timeframe and the stock's characteristics.
Q3: How does beta relate to diversification?
A: Combining assets with different betas can help create a portfolio with your desired overall market risk exposure.
Q4: What are limitations of beta?
A: Beta assumes normal return distributions and constant volatility, which may not hold true. It also only measures systematic risk, not company-specific risk.
Q5: How often should beta be recalculated?
A: Beta should be updated periodically as it can change over time with company fundamentals and market conditions.