Beta
It is also termed as a beta coefficient. It is a measure of the risk of a stock or portfolio in comparison to the market risk. The CAPM (Capital Asset Pricing Model) uses the beta coefficient. It only takes systematic risk into account. Beta Calculator helps in making calculations easier.
Since the systematic risk, or we can say non-diversifiable risk, is related to the whole economy and not to a specific industry. And hence, we cannot avoid it. But there are certain methods such as asset allocation or hedging to reduce this risk. Examples of systematic risk include tax reforms, flight of capital, interest rate hikes, etc. So, beta helps in computing and assessing the risk of a particular stock or portfolio in comparison to the market.
Formula
To calculate the beta of a security or portfolio, we divide covariance between the return of security and market return by the variance of the market return.
The formula of beta is as follows:
Beta = Covariance (rs, rm) / Variance (rm)
Where,
rs = Return on Security
rm = Market Return
About the Calculator / Features
The beta calculator is an easy-to-go online tool that quickly calculates Beta Coefficient by simply inserting the following figures into it:
- Covariance (rs, rm)
- Variance (rm)
Calculator
Beta Calculator
This calculator will calculate BetaCovariance (Rs, Rm)*
Input CovarianceVariance (Rm)*
Input Variance
Press the button once you have inserted valuesBeta
How to Calculate using Beta Calculator
The user is required to simply insert the following details into the calculator for the quick result of the calculation.
Covariance
A covariance is a tool for measuring the statistical relationships between two different variables. The result of covariance lies between -∞ to +∞. This means that the covariance can be negative as well. A negative covariance determines that the movement is in the opposite direction, while a positive covariance defines movement in the same direction. It is denoted as CoV in short. The formula for calculating Covariance is as follows:
Covariance = ∑ (xi – x̄) (yi – ȳ) / (n – 1)
Where, x & y = data value of x & y respectively.
x̄ = Average of data values of x
ȳ = Average of data values of y
n = number of data values
Variance
Variance can be defined as the square of standard deviation. It is denoted as (σ2). It is the total of each value in the data set subtracted by the average of the data set and divided by the total numbers in the data set less one. The variance can be calculated by using the following formula:
Variance = ∑ (xi – x̄)2 / (n – 1)
Example of Beta
An example would help in providing more clarity on the concept.
Suppose an investor wants to calculate and compare the Beta of X Ltd. and Y Ltd. Variance of X Ltd. is 0.0085, while the variance of Y Ltd. is 0.0075.
Beta of X Ltd. = 0.0085 / 0.0075 = 1.133
Interpretation
Beta signifies the change for every 1% in one variable causing the change in another variable. In the example above, the security of X Ltd. is 13.33% riskier than the security of Y Ltd.
Cautions
The beta coefficient is reliable only in the case of stocks whose trade occurs more frequently. It is useful in the short run only. The investors investing, in the long run, may not consider it.
