Beta Definition: What it Means and How to Calculate it (2024)

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Beta Definition: What it Means and How to Calculate it? ›

A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The calculation helps investors understand whether a stock moves in the same direction as the rest of the market.

In this context, covariance refers to the measure of a stock's return relative to that of the market. And variance refers to the measure of how the market moves relative to its mean. Once those figures are identified, beta is calculated by dividing covariance by variance (Beta = Covariance/Variance).

What Is Beta? Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.

A beta value of 1.5 indicates that the price of the stock is more volatile than the market. In fact, it is assumed to be 50% more volatile than the market. Tech stocks and small caps tend to have high betas.

What is Beta in Finance? The beta (β) of an investment security (i.e., a stock) is a measurement of its volatility of returns relative to the entire market. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model (CAPM).

To calculate beta, investors divide the covariance of an individual stock (say, Apple) with the overall market, often represented by the Standard & Poor's 500 Index, by the variance of the market's returns compared to its average return.

Beta, often considered first, quantifies an asset's volatility or systematic risk compared to the market as a whole. A beta of one indicates that an investment tends to move in line with the market, while a beta greater than one suggests higher volatility, and less than one implies lower volatility than the market.

(of an animal) having the second-highest rank in a dominance hierarchy: the beta female in a pack of meerkats. Slang: Sometimes Disparaging. being or relating to a man who is perceived to be weak, mild-mannered, and unimpressive.

StATS: What is a beta level? The beta level (often simply called beta) is the probability of making a Type II error (accepting the null hypothesis when the null hypothesis is false). It is directly related to power, the probability of rejecting the null hypothesis when the null hypothesis is false.

What is a good beta value? ›

Beta Values

Beta Less than 1: A beta value less than 1.0 means the security is less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Utility stocks often have low betas because they move more slowly than market averages.

Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall stock market. In other words, it gives a sense of the stock's risk compared to that of the greater market's. Beta is used also to compare a stock's market risk to that of other stocks.

Beta Ratio is the ratio between the line inner diameter to bore size of the orifice. The flow coefficient is found to be stable between beta ratio of 0.2 to 0.7 below which the uncertainity in flow measurement increases.

To calculate the beta value of a stock, a spreadsheet program is useful for calculating the covariance of the stock and index returns, then dividing that by the variance of the index. If a stock returned 8% last year and the index returned 5%, a rough estimate of beta is: 8 / 5 = 1.6.

In investing, downside beta is the beta that measures a stock's association with the overall stock market (risk) only on days when the market's return is negative. Downside beta was first proposed by Roy 1952 and then popularized in an investment book by Markowitz (1959).

Beta is also a measure of the covariance of a stock with the market. It is calculated using regression analysis. A beta of 1 indicates that the security's price is expected to move with the market. A beta greater than 1 indicates that the security's price is expected to be more volatile than the market.

Calculating Beta

A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The calculation helps investors understand whether a stock moves in the same direction as the rest of the market.

If a stock had a beta of 0.5, we would expect it to be half as volatile as the market: A market return of 10% would mean a 5% gain for the company. Here is a basic guide to beta levels: Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely.

Also, the beta function can be calculated using the factorial formula: B ( p , q ) = ( p − 1 ) ! ( q − 1 ) ! ( p + q − 1 ) !

The beta ratio is an indicator of how well a filter controls particulate: i.e., if one out of every two particles (>xmm) in the fluid pass through the filter, the beta ratio at xmm is 2, if one out of every 200 of the particles (>xmm) pass through the filter the beta ratio is 200.