1. What Is Beta?

Beta (β) is a measure of a stock's volatility in relation to the overall market. It indicates how much a stock's price tends to move compared to changes in the market index.

2. How Does The Calculator Work?

The calculator uses the beta formula:

Where:

• \( \text{Cov}(Stock1, Stock2) \) — Covariance between Stock1 and Stock2 returns
• \( \text{Var}(Stock2) \) — Variance of Stock2 returns

Explanation: Beta measures the sensitivity of Stock1's returns to changes in Stock2's returns. Typically, Stock2 represents a market index when calculating market beta.

3. Importance Of Beta Calculation

Details: Beta is a key component in the Capital Asset Pricing Model (CAPM) and helps investors understand the risk-return profile of a stock relative to the market.

4. Using The Calculator

Tips: Enter comma-separated percentage returns for both stocks. Ensure both arrays have the same number of data points and at least 2 observations for valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What does a beta of 1.0 mean?
A: A beta of 1.0 indicates the stock tends to move with the market. Beta > 1.0 means more volatile than market, beta < 1.0 means less volatile.

Q2: How many data points are needed for accurate beta calculation?
A: Typically, 3-5 years of monthly returns (36-60 data points) provides a reliable beta estimate, though more data generally improves accuracy.

Q3: Can beta be negative?
A: Yes, negative beta indicates the stock moves inversely to the market, which is rare but possible for certain defensive stocks or inverse ETFs.

Q4: What are the limitations of beta?
A: Beta assumes past volatility patterns will continue, doesn't account for new information, and may not accurately reflect future risk.

Q5: How often should beta be recalculated?
A: Beta should be recalculated periodically (quarterly or annually) as market conditions and company fundamentals change over time.