What is Beta in Finance ?

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Hello friends lets understand beta in finance & investing world 

What is Beta in Finance?


The beta (β) of an investment security (i.e., a stock) is a measurement of its volatility of returns relative to the entire market. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model A company with a higher beta has greater risk and also greater expected return's


The beta coefficient can be interpreted as follows:

  • β =1 exactly as volatile as the market
  • β >1 more volatile than the market
  • β <1>0 less volatile than the market
  • β =0 uncorrelated to the market
  • β <0 negatively correlated to the market

Examples of Beta

High β – A company with a β that’s greater than 1 is more volatile than the market. For example, a high-risk technology company with a β of 1.75 would have returned 175% of what the market returned in a given period (typically measured weekly).

Low β – A company with a β that’s lower than 1 is less volatile than the whole market. As an example, consider an electric utility company with a β of 0.45, which would have returned only 45% of what the market returned in a given period.

Negative β – A company with a negative β is negatively correlated to the returns of the market. For example, a gold company with a β of -0.2, which would have returned -2% when the market was up 10%.

Calculation

Below is an Excel β calculator that you can download and use to calculate β on your own. β can easily be calculated in Excel using the Slope function.

Follow these steps to calculate β in Excel:

  1. Obtain the weekly prices of the stock
  2. Obtain the weekly prices of the market index (i.e., S&P 500 Index)
  3. Calculate the weekly returns of the stock
  4. Calculate the weekly returns of the market index
  5. Use the Slope function and select the weekly returns of the market and the stock, each as their own series
 













Congrats! The output from the Slope function is the β


Thanks for reading 

Wise investing 

Knowledge is growth 









 

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