How to calculate equity beta

Written by james collins
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How to calculate equity beta
Use a spreadsheet to calculate equity beta. (Jupiterimages/Comstock/Getty Images)

In general, investors can invest in company through bonds and stock. Bonds represent a debt to the company and investors are compensated for the use of their funds with interest. Stocks represent a share of ownership and stockholders are compensated with share price appreciation, but do not have to be paid back if the price of the shares falls. Stocks are considered riskier than bonds and therefore offer a higher possibility for return. The risk of investing in a particular stock is measured with a metric referred to as equity beta.

Skill level:
Easy

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Things you need

  • Spreadsheet

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Instructions

  1. 1

    Look up the historical data for the stock. You can find this by looking up the information on your favourite investment research site such as Yahoo! Finance, Google Finance or MSN. You can also contact the Investor Relations department for the company to request historical pricing data. You will need at least one year (365 days) of data.

  2. 2

    Find historical pricing data for the Dow Jones Industrial Average. This is one of the most popular average stock index in the world and can be found in most any newspaper or investment research site. Use this as a proxy for benchmark prices.

  3. 3

    Open an instance of a spreadsheet. Enter historical stock data in column A and benchmark data in column B. Calculate the per cent change for column A and column B in columns C and D, respectively. The calculation is cell two minus cell one divided by cell one. Then multiply the answer by 100 for the percentage. Do this for all 365 days for both columns.

  4. 4

    Calculate beta. Due to the nature of the calculation you must use a formula within the spreadsheet to calculate it. The function is referred to as the slope function and is used to find the slope of the securities market line which is the line plotted by per cent changes calculated from both column A and column B. Column A represents the first line and column B represents the second line. The formula looks like this: =SLOPE(ColumnA1:ColumnA365,ColumnB1:ColumnB365).

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