Calculating Beta
A stock has a covariance with the market of 0.03 and the market variance is 0.02.
- covariance:
- 0.03
- variance:
- 0.02
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Valuation⚗ Includes simulator
Beta
Beta measures the sensitivity of a stock's return relative to the overall market.
Deep dive
Beta is a risk indicator that measures the volatility of a stock's return relative to the overall market. A beta greater than 1 indicates the stock is more volatile than the market, while a beta less than 1 means it is less volatile. Beta is used in the CAPM model to calculate the cost of equity. It differs from variance as it compares a stock's volatility to the market rather than to its own average.
Key formula
Beta = Covariance (stock return, market return) / Variance (market return)
Real-world examples
Pitfalls to avoid
- Using a beta based on outdated data.
- Neglecting the impact of recent market changes.
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