To calculate the beta value of a stock, a spreadsheet program is useful for calculating the covariance
Covariance
In probability theory and statistics, covariance is a measure of how much two random variables change together. If the greater values of one variable mainly correspond with the greater values of the other variable, and the same holds for the lesser values, i.e., the variables tend to show similar behavior, the covariance is positive.
What stocks have the highest beta?
- Microsoft has a beta of around 1.25. This means an investor can reasonably expect that this stock is 25% more volatile than the market. ...
- Walt Disney Company has a beta right around 1.03. This puts its volatility right in line with the broader market. ...
- In contrast, Duke Energy has a beta of around 0.27. ...
What factors determine the beta of a stock?
Beta is determined by the cyclicality of a firm's revenues. This cyclicality is magnified by the firm's operating and financial leverage. (1) Revenues. The cyclicality of a firm's sales is an important factor in determining beta. In general, stock prices will rise when the economy expands and will fall when the economy contracts.
What is a good beta value for a stock?
- Market value: $9.1 billion
- Dividend yield: N/A
- Forward P/E ratio: 13.4
- Analysts' ratings: 6 Strong Buy, 3 Buy, 0 Hold, 1 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.60 (Buy)
What is the beta of each of the stocks?
High Beta Stocks Versus Low Beta. Here’s how to read stock betas: A beta of 1.0 means the stock moves equally with the S&P 500. A beta of 2.0 means the stock moves twice as much as the S&P 500. A beta of 0.0 means the stocks moves don’t correlate with the S&P 500. A beta of -1.0 means the stock moves precisely opposite the S&P 500.
How do you calculate beta price of a stock?
Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation of the security's returns and the benchmark's returns.
What does a 0.8 beta mean?
If the stock is more volatile than the market, its beta will be more than 1, and if it is less volatile than the market, its beta will be less than 1. For example, a stock with a beta of 0.8 would be expected to return 80% as much as the overall market.
What does a beta of 1.25 mean?
Beta indicates how volatile a stock's price is in comparison to the overall stock market. A beta greater than 1 indicates a stock's price swings more wildly (i.e., more volatile) than the overall market. A beta of less than 1 indicates that a stock's price is less volatile than the overall market.
What does a beta of 1.5 mean?
Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).]
What does 1.2 beta indicate?
A beta that is greater than 1.0 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark.
What does a β of 1.3 mean?
The beta for a stock describes how much the stock's price moves compared to the market. If a stock has a beta above 1, it's more volatile than the overall market. For example, if an asset has a beta of 1.3, it's theoretically 30% more volatile than the market.
What does a beta of 0.7 mean?
A fund with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark's changes. A beta of 1.3 means the total return is likely to move up or down 30% more than the index. A fund with a 1.0 beta is expected to move in sync with the index."
What is a good beta in stocks?
Stocks with a value greater than 1 are more volatile than the market (meaning they will generally go up more than the market goes up, and go down more than the market goes down). Stocks with a beta of less than 1 have a smoother ride as their moves are more muted than the market's.
Is negative beta good?
In general, high beta means high risk, but also offers the possibility of high returns if the stock turns out to be a good investment. A negative beta coefficient, on the other hand, means the investment moves opposite of market direction.
What does a beta of .3 mean?
Key Takeaways. Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.
What does a beta of 0.9 mean?
A beta that is greater than 1.0 means that the fund is more volatile than the benchmark index. A beta of less than 1.0 means that the fund is less volatile than the index. In theory, if the market goes up 10%, a fund with a beta of 1.0 should go up 10%; if the market drops 10%, the fund should drop by an equal amount.
What is beta and PE ratio?
The beta measures the risk. The PE ratio gives an indication of the expected future growth – higher PE suggests shareholders are expecting higher future growth – when comparing companies within a particular sector.
What is beta in stock market?
Stock Beta is one of the statistical tools that quantify the volatility in the prices of a security or stock with reference to the market as a whole or any other benchmark used for comparing the performance of the security. It is actually a component of Capital Asset Pricing Model (CAPM)
What does it mean when the beta of a stock is negative?
The Stock Beta can have three types of values: Beta < 0: If the Beta is negative, then this implies an inverse relationship between the stock and the underlying market or the benchmark in comparison. Both stock and the market or the benchmark will move in the opposite direction. Beta = 0: If the Beta is equal to zero, ...
What does a beta of 1 mean?
Beta of 1 implies that the volatility of the stock is exactly the same as that of the underlying market or the index in both qualitative and quantitative terms. Beta of greater than 1 implies that the stock is more volatile than the underlying market or index. A negative Beta is possible but highly unlikely.
What does it mean when the beta is greater than zero?
Beta > 0: If the Beta is greater than zero, then there is a strong direct relationship between the stock and the underlying market or the benchmark. Both stock and the market or the benchmark will move in the same direction. Some further insight is as follows:
What does it mean when the beta is 0?
Beta = 0: If the Beta is equal to zero, then this implies that there is no relation between the movement of the returns of the stock and the market or the benchmark, and hence both are too dissimilar to have any common pattern in price movements . Beta > 0: If the Beta is greater than zero, then there is a strong direct relationship between ...
Is a negative beta of gold a good thing?
A negative Beta is possible but highly unlikely. Most investors believe that gold and stock based on gold tend to perform better when the market dives. Whereas a Beta of zero is possible in the case of government bonds acting as risk-free securities providing a low yield to the investors.
Why should gold stocks have negative beta?
Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines.
Why do stocks have beta?
The beta is the number that tells the investor how that stock acts compared to all other stocks, or at least in comparison to the stocks that comprise a relevant index.
What does a beta of utility mean?
Many utility sector stocks have a beta of less than 1. Essentially, beta expresses the trade-off between minimizing risk and maximizing return. Say a company has a beta of 2. This means it is two times as volatile as the overall market. We expect the market overall to go up by 10%.
What is the beta of cash?
Beta of 0: Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation). Beta between 0 and 1 : Companies that are less volatile than the market have a beta of less than 1 but more than 0. Many utility companies fall in this range.
What does beta mean in investing?
In investing, beta does not refer to fraternities, product testing, or old videocassettes. Beta is a measurement of market risk or volatility. That is, it indicates how much the price of a stock tends to fluctuate up and down compared to other stocks.
What does it mean when a stock has a beta of over 100?
If you see a beta of over 100 on a research site it is usually a statistical error or the stock has experienced a wild and probably fatal price swing. For the most part, stocks of established companies rarely have a beta higher than 4.
What does a beta of 1 mean?
A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.
What is covariance in portfolio management?
To clarify, Covariance is a measurement of the directional relationship between two numbers. In the Beta Coefficient, the two numbers are the market return and the stock return. You can learn how to calculate covariance here. In portfolio management theory, the Variance of Return is a measure of an individual stock’s risk by itself.
How to calculate beta of a stock?
Here is a straightforward formula for calculating the Beta Coefficient of a Stock: 1 Obtain the stock’s historical share price data. 2 Obtain historical values of a market index, e.g., S&P 500. 3 Convert the share price values into daily return values using the following formula: return = (closing share price − opening share price)/opening share price. 4 Convert historical stock market index values in a similar way. 5 Align the share return data with index return such that there is a 1-on-1 correspondence between them. For share price return, there should be a corresponding index return. 6 Using the SLOPE function in a financial calculator to find the slope between both arrays of data and the resultant figure is Beta.
What is the beta coefficient?
Generally, analysts regard the Beta Coefficient as a measure of systematic or “general market” risk. Analysts often use the mathematical symbol β to represent the Beta in calculations. To explain, systematic is the level of risk or volatility of equity in the entire market or index.
What does beta mean in stocks?
Beta can give you an estimate of the stock’s risk and some idea of market volatility. Ideally, the Beta will tell you the difference between a stock’s risk and the risk of an entire index market.
Why do analysts use the beta coefficient?
Analysts examine the Beta Coefficient, or Beta of stock, because the Beta measures risk and volatility. Specifically, the Beta can give you an estimate of the stock’s risk and some idea of market volatility. Ideally, the Beta will tell you the difference between a stock’s risk and the risk of an entire index market.
Why is beta a limited tool?
Hence, the Beta is a limited tool because it only measures some risks associated with individual stocks or indexes. However, a rough estimate of risk is better than no estimate of risk.
What does a value of 5 mean?
A value of 1 means it moved with the market, a value of 2 means it moved up and down with the market but twice as much, and a value of .5 means it moved up and down half as much as the market did. Strategic Beta for Funds & ETFs.
What is negative beta?
Beta is the calculation of change, i.e., the change in the stock relative to the change in the market. In theory, when investing in a high beta stock, an investor generally should demand a higher return.
Why is beta important?
The beta comes in to adjust that market premium as beta is positively correlated with the market. It helps us understand if a stock is more volatile—with a beta of greater than one (β>1)—or less volatile—with a beta of less than one (β<1) than the market. Movement relative to the market is risk that cannot be removed through diversification.
Is it possible to use the wrong beta?
And yes, that’s possible. But, also it could be the wrong beta to use too. Which is exactly why one of the top valuation mistakes is valuing a stock using the calculated beta—using a too high or too low beta, using Bloomberg’s beta, or using your own calculated beta will all help you arrive at vastly different metrics.
What does higher beta mean?
A higher beta indicates great volatility, and a lower beta indicates less volatility. Calculating beta for a given stock is not too difficult, despite the intimidating jargon. To calculate it, all you need is some market data over a period of time and a spreadsheet program. Why calculate beta yourself?
What does a beta of 1 mean?
A beta of 1 means that a stock's volatility matches up exactly with the markets. A higher beta indicates great volatility, and a lower beta indicates less volatility.
How long should you use beta?
If you're a buy and hold investor, you should use a longer time period to calculate beta, maybe five or even 10 years. If you're a trader, buying and selling frequently, you should use a beta over a much shorter time frame, potentially just a few weeks, days, or even less.
Computational Notes
beta = covariance of the stock's and the benchmark's returns / variance of the benchmark's returns
Beta Values Vary from Site to Site
Because popular financial sites use different algorithms (time periods, prices series and benchmarks) to compute beta, beta values can vary greatly between sites.
Preparation
Choose a benchmark index and a time horizon for your calculations. Use benchmark indexes and time horizons that suit your chosen stock and trading strategies. Your chosen index should generally represent the economy of the nation and sector in which your stock trades.
Calculation
Calculate daily percentage changes for your stock and index. Percentage changes are calculated as follows:
