How to calculate beta

The beta of a stock is a measure of its price volatility in comparison to the volatility of the market. If beta equals 1, then its variability is exactly the same as that of the market as a whole. If the beta is higher than 1, then the price of a stock is more volatile than the market level. If the beta is lower than 1, then the price of a stock is less volatile than the market level.

The beta for a publicly-held stock is regularly published, but it can make sense to directly calculate your own beta. The reason is that the benchmark stock index used for a generic beta calculation may not be directly applicable to a stock. For example, if the benchmark index is the S&P 500 and the company issuing the target stock has most of its operations in a different country, it can make sense to derive a benchmark figure from stocks in that country. Also, the period over which the beta calculation is made may be quite long for buy-and-hold investors, and vastly shorter for an investor who only plans to retain a stock for a few days or weeks. In these situations, it can make sense to develop your own beta.

The steps needed to calculate beta are as follows:

1. Accumulate the daily closing prices for the target stock and for the market index to be used as a benchmark. Accumulate this information over the period that is most suitable to your needs - perhaps as little as a month, or perhaps for several years.

2. Calculate the daily price change, separately, for the target stock and the market index. The formula is:

((Price today - Price yesterday) / Price yesterday) x 100

3. Then compare how the stock and the index move together, relative to how the index moves alone. The result of this calculation is the beta of the stock. The formula for doing so is:

Covariance ÷ Variance

Or, stated in more detail:

Stock's daily change and index's daily change ÷ Index's daily change 

In Excel, the formula for beta is:

=COVARIANCE.P(Cell range for stock's daily change percentage, Cell range for index's daily change percentage)/VAR(Cell range for index's daily change percentage)

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