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Trading and Investment Terms

Beta

Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market.

Beta is the key factor used in the Capital Asset Price Model (CAPM) which is a model that measures the return of a stock. 

The volatility of the stock and systematic risk can be judged by calculating beta. 

A positive beta value indicates that stocks generally move in the same direction with that of the market and vice versa.

 

For example, if a stock's beta value is 1.3, it means, theoretically this stock is 30% more volatile than the market. 

The beta calculation is done by regression analysis which shows security's response with that of the market.

 

By multiplying the beta value of a stock with the expected movement of an index, the expected change in the value of the stock can be determined. 

 

For example, if the beta is 1.3 and the market is expected to move up by 10%, then the stock should move up by 13% (1.3 x 10).

 

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 series
  6. Congrats! The output from the Slope function is the β

 

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