1. What is Stock Beta?

Beta (β) measures a stock's volatility relative to the overall market. It shows how much the stock's price tends to move compared to the market. A beta of 1 means the stock moves with the market, less than 1 means less volatile, and more than 1 means more volatile.

2. How Does the Calculator Work?

The calculator uses the beta formula:

Where:

• \( \text{cov}(r_{stock}, r_{market}) \) — Covariance between stock and market returns
• \( \text{var}(r_{market}) \) — Variance of market returns
• \( \beta \) — Beta coefficient (dimensionless)

Explanation: Beta is calculated by dividing the covariance of the stock's returns with the market's returns by the variance of the market's returns.

3. Importance of Beta Calculation

Details: Beta is crucial for the Capital Asset Pricing Model (CAPM), portfolio construction, and risk assessment. It helps investors understand a stock's risk profile relative to the market.

4. Using the Calculator

Tips: Enter historical returns for both the stock and market index (like S&P 500) as comma-separated values. Ensure both sets have the same number of data points.

5. Frequently Asked Questions (FAQ)

Q1: What does a beta of 1.5 mean?
A: A beta of 1.5 means the stock is 50% more volatile than the market. If the market moves 10%, the stock tends to move 15%.

Q2: Can beta be negative?
A: Yes, negative beta means the stock moves inversely to the market (rare, seen in some inverse ETFs or gold stocks).

Q3: What time period should I use for returns?
A: Typically 3-5 years of monthly returns, but depends on your analysis needs. Longer periods provide more stable estimates.

Q4: How does beta relate to diversification?
A: Combining stocks with different betas can help create a portfolio with your desired overall risk level.

Q5: What are limitations of beta?
A: Beta assumes normal market conditions and past volatility predicts future risk, which may not always hold true.