Beta calculates the past relationship for stock’s returns compared to the Index. Above 1 indicates a stock price has moved more than the Index, less than 1 historically lower price movements.

The Beta of a stock is the measure of the historical movements of the stock price compared to the Index of which it is a constituent. A stock’s Beta can be calculated based on anywhere from a 36 to 60-month regression analysis of the stock’s returns against the Index. If a stock’s Beta is 1 then over the regression period, its returns have been the same as for the Index. However, this does not mean the returns were always identical. A High Beta stock will have a Beta over 1, for example 1.25. A Low Beta stock less than 1, for example 0.83.

Beta Formula
Beta = Covariance (Rs, Rm) / Variance (Rm)
Rm = average expected rate of return on the market
Rs = expected return on Stock S

The interpretation of the Beta Formula is this. If the Index goes up by 100 points from 5,500 to 5,600, then a stock with a starting price of $46.50 and a Beta of 1.25 should go to $47.55. An increase of 2.3%. The stock’s Beta of 1.25 indicated that the price movement of the stock should be 25%, greater than the increase of the Index, which was 1.8%. If a stock has a Beta lower than 1, for example 0.95, as the Index increases 1.8%, the stock’s price movement should go up but less than the market. In the previous example the end price should be $47.23, a 1.71% increase.

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Warren William

Meet the author behind Smartest-Data. Warren William has a career in Finance and Investments extending over 35 years, both on the Buy Side and Sell Side. His most recent roles include, developing Institutional Risk Management Programs for managing Equity and Fixed Income Risk.  Prior to this Warren William work in Alternative Investments, in Investment Management and as a Buy Side Equity Analyst. Warren William brings a wealth of knowledge and expertise to the table, providing in-depth analysis and commentary on the latest trends in the Stock Markets. Contact information: wwBLOG@smartest-data.blog or Telegram +393339034488

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