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Beta Coefficient Formula:
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The beta coefficient (β) measures a stock's volatility relative to the overall market. It quantifies the systematic risk of an investment and indicates how much a stock's price tends to move compared to market movements.
The calculator uses the beta coefficient formula:
Where:
Explanation: Beta measures how much a stock's returns move in relation to market returns. A beta of 1 indicates the stock moves with the market, while betas greater or less than 1 indicate higher or lower volatility respectively.
Details: Beta is crucial for portfolio management, risk assessment, and capital asset pricing model (CAPM) calculations. It helps investors understand the systematic risk of their investments and make informed decisions about portfolio diversification.
Tips: Enter the covariance between stock and market returns, and the variance of market returns. Both values should be calculated from historical return data over the same time period. Variance must be greater than zero.
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% in the same direction.
Q2: What is considered a high beta?
A: Typically, beta > 1.2 is considered high, indicating higher volatility than the market. Beta < 0.8 is considered low, indicating lower volatility.
Q3: Can beta be negative?
A: Yes, negative beta indicates the stock moves in the opposite direction of the market. This is rare but can occur with certain defensive stocks or inverse ETFs.
Q4: How is beta used in CAPM?
A: In the Capital Asset Pricing Model, beta is used to calculate expected returns: 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 doesn't account for unsystematic risk and assumes normal market conditions.