"Stock beta" is a financial term that measures the risk or volatility of a stock. Beta can "provide serious stock analysts with insights into the movements of a particular stock relative to market movements," according to the Money-Zine web site. Learning how to calculate a stock's beta is easy, if you understand the concept of betas and what variables to use in the formula.
- Skill level:
Interpret betas. If the stock movements are greater than the stock market, the beta must be greater than one. If the stock movements are less, the beta value must be less than one. A large beta equals a larger risk and reward.
Calculate the rate of returns. The formula is "r = rf + beta (rm -- rf)." RF is the risk-free interest rate that the investors expect to receive from risk-free investments. Beta describes the relationship between the movements of the market versus the individual stock. RM is the market returns that the investor is expected to receive from the stock market.
Calculate beta. Use the closing stock prices for your stock and the closing prices for the index and plug them into the beta formula. "Beta = Covariance (stock versus market returns) / Variance of the Stock Market."
Use Microsoft Excel. Open Excel and enter the beta formula and the needed variables into the formula bar and a column and row into the name bar. Press "Enter" and the beta answer will appear on the designated column and row.
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