1. What is Beta Stock?

Beta (β) measures a stock's volatility relative to the overall market. It represents the slope of regression between stock returns and market returns. A beta of 1 indicates the stock moves with the market, while >1 means more volatile and <1 means less volatile than the market.

2. How Does the Calculator Work?

The calculator uses the beta formula:

Where:

• \( Cov(r_s, r_m) \) — Covariance between stock returns and market returns
• \( Var(r_m) \) — Variance of market returns

Explanation: Beta quantifies how much a stock's returns change for each 1% change in the market's returns.

3. Importance of Beta Calculation

Details: Beta is crucial for the Capital Asset Pricing Model (CAPM), portfolio construction, and risk assessment. It helps investors understand a stock's systematic risk.

4. Using the Calculator

Tips: Enter the covariance between stock and market returns, and the variance of market returns. Both values should be calculated from the same time period.

5. Frequently Asked Questions (FAQ)

Q1: What does a negative beta mean?
A: Negative beta indicates the stock moves inversely to the market, which is rare but can occur with certain inverse ETFs or gold stocks.

Q2: What time period should be used for calculations?
A: Typically 3-5 years of monthly returns, but depends on investment horizon and data availability.

Q3: How does beta relate to diversification?
A: Combining stocks with different betas can reduce portfolio volatility. Negative beta assets can hedge against market downturns.

Q4: What are limitations of beta?
A: Beta assumes normal market conditions and may not predict behavior during market crises. It also doesn't account for unsystematic risk.

Q5: How often should beta be recalculated?
A: Quarterly or annually, as a company's risk profile and market conditions change over time.