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Beta is a ratio that measures the volatility or riskiness of a particular security relative to the volatility of the entire stock market. [1] X Research Source The beta is a measure of the riskiness of a particular security, and it is used to evaluate the expected return of that security. This ratio is one of the basic principles often considered by analysts when choosing stocks for their portfolio, besides the price-to-earnings ratio, shareholder equity, debt-to-equity ratio, and debt-to-earnings ratio. equity and other factors.
Steps
Calculate beta using simple equation
- If one or all of these values are negative, investing in the stock or market (indices) generally means a loss for the period. If only one of these two ratios is negative, the beta will be negative.
- The beta of the market itself (or the appropriate index) is essentially 1.0 – when the market is compared to itself, and any number (except zero) divided by itself equals 1. [2 ] X Research Source If the beta is less than 1, the stock is less volatile than the overall market, and a beta greater than 1 means the stock is more volatile than the overall market. The beta value can be less than zero, when the stock loses money while the whole market is up (more likely) or the stock rallies while the market as a whole loses money (less likely). ).
- When calculating beta, although not required, it is common to use an index that represents the market in which the stock is trading. For US stocks, the S&P 500 index is commonly used, although an analysis of industrial stocks may be more accurate when comparing the stock to the Dow Jones Industrial Average. There are several other indicators that can be used. For internationally traded stocks, the MSCI EAFE (representing Europe, Australasia, and the Far East) is a suitable proxy.
Use Beta to determine a stock’s rate of return
- The higher the beta value of a stock, the higher the stock’s rate of return. However, high returns come with increased risk, so it’s important to consider the stock’s other fundamentals before considering whether to add it to your portfolio. Are not.
Use the Excel graph to determine the Beta . value
- The longer the timeframe you choose, the more accurate the beta calculation will be. You’ll see the beta change when you track both the stock and the index over a longer period of time.
- Because returns are calculated over time , you don’t need to enter anything in the first box; leave this box blank. You need at least two data points to calculate the return, which is why you will start in the second cell of the index’s return column.
- The calculation above is essentially subtracting the older value from the closest value and then dividing the result by the older value. This calculation shows you the percentage of loss or growth for that period.
- The equation for your yield column would probably look like this: =(B3-B2)/B2
- Choose a linear trend line, not a polynomial or a moving average.
- Whether your chart shows the equation and R value of 2 will depend on the version of Excel you are using. Newer versions will allow you to plot the equation and R 2 value by clicking on Excel’s Chart Quick Layouts and finding the equation template and R 2 value.
- For older versions of Excel, navigate to Chart → Add Trendline → Options. Then check both the “Display equation on chart” and “Display R 2 value on chart,” “Display R 2 value on chart,” boxes.
- The R value of 2 represents the correlation between the variance of stock returns and the variance of overall market returns. For example, this value is high, 0.869, indicating that stock returns are strongly correlated with overall market returns. For example, this value is low, around 0.253, indicating that the two types of returns are not very correlated with each other. [4] X Research Sources
Find out the meaning of Beta
- Example: Assuming the beta of Gino’s Germ Exterminator stock is calculated at 0.5 relative to the S&P 500 index – the benchmark against which Gino is being compared, the stock is only half as risky. If the S&P index drops 10%, Gino’s stock price will tend to fall only 5%.
- As another example, let’s say Frank’s Funeral Service stock has a beta of 1.5 against the S&P index. Thus, if the S&P falls 10%, then Frank’s stock price falls more than the S&P, about 15%.
- For example, let’s say Vermeer’s Venom Extraction stock has a beta value of 0.5. When the stock market rallied 30%, Vermeer’s stock rose only 15%. But when the stock market fell 30%, Vermeer lost only 15%.
Advice
- Note: it is possible that classical covariance is not used because time series financial data are often “tilted towards the end”. In practice, the standard deviation and standard mean of the underlying distribution may not exist! So, instead of using the standard deviation and standard mean, we can use the interquartile scatter and the median instead.
- Beta coefficient analyzes the volatility of a stock over a certain period of time, regardless of whether the market is up or down. As with other fundamentals, analysis of past movements cannot guarantee future stock movements.
Warning
- Beta alone cannot be used to determine which of the two stocks is riskier if the stock is more volatile, but there is a correlation between lower returns to the market and less volatility. stocks with lower volatility but higher correlation between returns relative to the market.
wikiHow is a “wiki” site, which means that many of the articles here are written by multiple authors. To create this article, 18 people, some of whom are anonymous, have edited and improved the article over time.
This article has been viewed 18,881 times.
Beta is a ratio that measures the volatility or riskiness of a particular security relative to the volatility of the entire stock market. [1] X Research Source The beta is a measure of the riskiness of a particular security, and it is used to evaluate the expected return of that security. This ratio is one of the basic principles often considered by analysts when choosing stocks for their portfolio, besides the price-to-earnings ratio, shareholder equity, debt-to-earth ratio, and debt-to-earnings ratio. equity and other factors.
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