A stock's beta coefficient is a measure of its volatility over time compared to a market benchmark. 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 to easily calculate the beta of a stock?
Top 3 Formula to Calculate Beta
- Covariance/Variance Method. To calculate the covariance Calculate The Covariance Covariance is a statistical measure used to find the relationship between two assets and is calculated as the standard deviation ...
- By Slope Method in Excel. We can also calculate Beta by using the slope function in excel. ...
- Correlation Method. ...
How do you calculate beta of stock?
Stock Beta formula. Stock’s Beta is calculated as the division of covariance of the stock’s returns and the benchmark’s returns by the variance of the benchmark’s returns over a predefined period. Below is the formula to calculate stock Beta. Stock Beta Formula = COV(Rs,RM) / VAR(Rm)
What do stocks have a high 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 is a good beta for stock?
The company’s P/E ratio in the trailing 12-month period was 10.12, while its 5Y monthly beta was 0.93. In examining the 52-week price action we see that the stock hit a 52-week high of $66.97 and a 52-week low of $46.13. Over the past month, the stock ...
What is a good beta for a stock?
What Is a Good Beta Value for a Stock? Whether or not a stock has a “good” beta value depends on what you are looking for in a stock. If you're risk averse, then look for a stock with a beta value at or below 1.0. If you're looking for something more exciting, then consider a stock with a value of above 2.0.
What does 1.5 beta mean in stocks?
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 is a good beta value?
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 1.5 A high beta?
A high beta (greater than 1.0) indicates moderate or high price volatility. A beta of 1.5 forecasts a 1.5% change in the return on an asset for every 1% change in the return on the market.
What does a beta of 1.20 indicate?
Trading-Glossary. "A measure of a fund's risk, or volatility, compared to the market which is represented as 1.0. A fund with a beta of 1.20 is 20% more volatile than the market, while a fund with a beta of 0.80 would be 20% less volatile than the market."
What does a beta of 0.8 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.
Is beta less than 1 GOOD?
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.
Is a 0.2 beta good?
Frequently researchers will select a sample size and decision rule to insure that beta is 0.20 or less (or equivalently power is 0.80 or more). Some researchers prefer to insure that the beta level is 0.10 or less.
Is High beta good?
A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.
What does a beta of 1.35 mean?
The market is described as having a beta of 1. 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 is the beta for Tesla?
FSD Beta enables Tesla vehicles to drive autonomously to a destination entered in the car's navigation system, but the driver needs to remain vigilant and ready to take control at all times.
What is the beta of Apple stock?
1.20Stock Price HistoryBeta (5Y Monthly)1.2052-Week Change 35.10%S&P500 52-Week Change 3-8.83%52 Week High 3182.9452 Week Low 3129.042 more rows
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.
What is asset beta?
Unlevered Beta / Asset Beta Unlevered Beta (Asset Beta) is the volatility of returns for a business, without considering its financial leverage. It only takes into account its assets. , on the other hand, only shows the risk of an unlevered company relative to the market.
Why is equity beta called equity beta?
It is also commonly referred to as “equity beta” because it is the volatility of an equity based on its capital structure. Capital Structure Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure.
What is leveraged beta?
Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure. It compares the volatility (risk) of a levered company to the risk of the market. Levered beta includes both business risk. Systemic Risk Systemic risk can be defined ...
How to calculate the weekly return of a stock?
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 6 Congrats! The output from the Slope function is the β
Is a company with a 0f 0.79 more volatile than the market?
Also, a company with a β of 1.30 is theoretically 30% more volatile than the market. Similarly, a company with a β 0f 0.79 is theoretically 21% less volatile than the market.
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.
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.
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.
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 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 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.
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.
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.
Can you use beta in stock analysis?
In the final analysis, the Beta is only one of many stock analysis tools you can use. In fact, some analysts and investors never use the Beta. On the other hand, there are many analysts who swear by the Beta. Hence using the Beta is a matter of choice.
Does the beta coefficient tell you the future price of a stock?
Or the effect of news stories about an accounting scandal; or lousy sales at a company. Consequently, the Beta will not tell you the future price of a stock. Instead, the Beta Coefficient provides a comparison of a stock’s risks to the entire market.
What is beta in stock market?
Learn more... Beta is the volatility or risk of a particular stock relative to the volatility of the entire stock market. Beta is an indicator of how risky a particular stock is, and it is used to evaluate its expected rate of return.
What is beta analysis?
Beta analyzes a stock's volatility over a set period of time, without regard to whether the market was on an upswing or downswing. As with other stock fundamentals, the past performance it analyzes is not a guarantee of how the stock will perform in the future. Thanks!
What does it mean when the beta is lower than 1?
The risk of an index is fixed at 1. A beta of lower than 1 means that the stock is less risky than the index to which it's being compared. A beta of higher than 1 means the stock is more risky than the index to which it's being compared.
How to interpret beta?
Know how to interpret beta. Beta is the risk, relative to the stock market as a whole, an investor assumes by owning a particular stock. That's why you need to compare the returns of a single stock against the returns of an index. The index is the benchmark against which the stock is judged. The risk of an index is fixed at 1. A beta of lower than 1 means that the stock is less risky than the index to which it's being compared. A beta of higher than 1 means the stock is more risky than the index to which it's being compared.
What does it mean when the beta is negative?
Usually the rates of return are figured over several months. Either or both of these values may be negative, meaning that investing in the stock or the market (index) as a whole would mean a loss during the period. If only one of the two rates is negative, the beta will be negative.
How to calculate the return of a stock?
Begin calculating returns for the stock market index. 1 Since return is a calculation over time, you won't put anything in your first cell; leave it blank. You need at least two data points to calculate returns, which is why you'll start on the second cell of your index-returns column. 2 What you're doing is subtracting the more recent value from the older value and then dividing the result by the older value. This just gives you the percent of loss or gain for that period. 3 Your equation for the returns column might look something like this: = (B4-B3)/B3
Less Risk and Lower Returns
Essentially then, the beta is a concept that measures ‘the total expected move in a stock as compared to the total movements in the financial market’.
Dividends
They also pay dividends and are a good idea amongst investors. In fact, Quest Diagnostics (DGX), ViacomCBS (VIAC), J.M. Smucker (SJM), General Mills (GIS), FirstEnergy (FE), Verizon Communications (VZ), and Costco (COST) are excellent ideas to consider. However, do your own due diligence with these stocks.
In Conclusion
Low beta stocks are very popular today. In fact, many of these top stocks today such as EIG employers, OBAS Optibase, and ACI Albertsons Companies are less risky, less volatile, and stand excellently in tough markets. They’re associated with low-risk businesses. They offer consistent earnings and higher stability in diversified portfolios.
What is the beta of the S&P 500?
Beta is a measure of risk commonly used to compare the volatility of stocks, mutual funds, or ETFs to that of the overall market. The S&P 500 Index is the base for calculating beta with a value of 1.0. Securities with betas below 1 have historically been less volatile than the market.
Is a B better than a C?
As you might remember from your school days, an A, is better than a B; a B is better than a C; a C is better than a D; and a D is better than an F. As an investor, you want to buy stocks with the highest probability of success.
What is beta in stocks?
Beta is a measure of a stock’s sensitivity to changes in the overall market. You can measure the beta in your portfolios with some basic math. Learn more about how to calculate the volatility, or beta, of your portfolio.
What does a beta of 1.0 mean?
A beta of 1.0 indicates that its volatility is the same as the benchmark. In other words, it moves in tandem with the benchmark. A number higher than 1.0 indicates more volatility than the benchmark, while a lower number indicates more stability. For example, a stock with a beta of 1.2 is 20% more volatile than the market, ...
Can you calculate beta using a benchmark?
For this reason, you may wish to calculate beta yourself to get a more precise answer. In some situations, you may prefer to calculate beta using a different benchmark.
Examples of Beta
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 i…
What Are Equity Beta and Asset Beta?
- Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure. It compares the volatility (risk) of a levered company to the risk of the market. Levered beta includes both business risk and the risk that comes from taking on debt. It is also commonly referred to as “eq…
Levered Beta vs Unlevered Beta
- Levered beta (equity beta) is a measurement that compares the volatility of returns of a company’s stock against those of the broader market. In other words, it is a measure of risk, and it includes the impact of a company’s capital structure and leverage. Equity beta allows investors to assess how sensitive a security might be to macro-market risks. For example, a company with a …
Calculation of Levered Beta
- There are two ways to estimate the levered beta of a stock. The first, and simplest, way is to use the company’s historical β or just select the company’s beta from Bloomberg. The second, and more popular, way is to make a new estimate for β using public company comparables. To use the comparables approach, the β of comparable companies is taken from Bloomberg and the un…
Interpreting Beta
- A security’s β should only be used when its high R-squared value is higher than the benchmark. The R-squared value measures the percentage of variation in the share price of a security that can be explained by movements in the benchmark index. For example, a gold ETF will show a low β and R-squared in relation to a benchmark equity index, as gold is negatively correlated with equit…
Related Readings
- Thank you for reading CFI’s guide to beta (β) of an investment security. To continue learning and advancing your career these additional resources will be helpful: 1. Types of Valuation Multiples 2. Analysis of Financial Statements 3. Leverage Ratios 4. Valuation Methods