1. What is Beta Calculation?

Beta (β) is a measure of a stock's volatility in relation to the overall market. It quantifies the systematic risk of an investment compared to the market as a whole.

2. How Does the Calculator Work?

The calculator uses the Beta formula:

Where:

• \( \beta \) — Beta coefficient (dimensionless)
• \( Cov(R_i, R_m) \) — Covariance between asset returns and market returns
• \( Var(R_m) \) — Variance of market returns

Explanation: Beta measures how much an asset's price moves relative to market movements. A beta of 1 indicates the asset moves with the market, while beta > 1 suggests higher volatility.

3. Importance of Beta Calculation

Details: Beta is crucial for portfolio management, risk assessment, and the Capital Asset Pricing Model (CAPM). It helps investors understand an asset's risk profile and expected returns.

4. Using the Calculator

Tips: Enter covariance and variance values (both must be positive). The calculator will compute the beta coefficient, which is dimensionless.

5. Frequently Asked Questions (FAQ)

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

Q2: What is considered a high beta?
A: Typically, beta > 1.2 is considered high, indicating above-market volatility. Beta < 0.8 is considered low volatility.

Q3: Can beta be negative?
A: Yes, negative beta indicates the asset moves opposite to the market direction, though this is rare.

Q4: How is covariance calculated?
A: Covariance = Σ[(Return_i - Mean_i) × (Return_m - Mean_m)] / (n-1) for sample data.

Q5: What time period should be used for beta calculation?
A: Typically 3-5 years of monthly returns are used, but the period can vary based on investment horizon and market conditions.