Calculate Beta
Range: -1 to 1 (typical stocks: 0.6 to 0.9)
%
Annual volatility of the asset
%
S&P 500 historical: ~15%
Covariance of decimal returns (e.g., 0.03)
Variance of decimal returns (e.g., 0.0225 for 15% std dev)
Quick Reference
- Beta = 1: Same volatility as market
- Beta > 1: More volatile than market
- Beta < 1: Less volatile than market
- Beta < 0: Moves opposite to market
Beta Result
Beta (Systematic Risk)
1.33
Formula Breakdown
β = ρ × (σi / σm)
= 0.80 x (25% / 15%)
= 0.80 x 1.667
= 1.33
Interpretation
High Beta: This asset is more volatile than the market. A beta of 1.33 means the asset tends to move 33% more than the market in either direction.
Understanding Your Result
| Negative | Moves opposite to market | |
| Very Low | Much less volatile | |
| Low | Less volatile than market | |
| Average | Similar to market | |
| High | More volatile than market | |
| Very High | Much more volatile |
Understanding Beta
What is Beta?
Beta measures an asset's systematic risk - how much its returns move in relation to the overall market. It's a key concept in the Capital Asset Pricing Model (CAPM) and portfolio management.
Beta answers the question: "When the market moves 1%, how much does this asset typically move?"
Key Insight: Beta only measures systematic (market) risk. It doesn't capture company-specific risks that can be diversified away. A high-beta stock isn't necessarily "riskier" in a diversified portfolio - it just amplifies market movements.
Two Ways to Calculate Beta
Beta can be calculated using two mathematically equivalent methods:
- Correlation Method: β = ρ × (σi / σm)
Uses the correlation coefficient and standard deviations - Covariance Method: Beta = Cov(Ri, Rm) / Var(Rm)
Uses covariance between asset and market divided by market variance
Both methods give identical results when using consistent data. Choose based on what data you have available.
Interpreting Beta Values
- Beta = 1: Asset moves with the market (e.g., broad index funds)
- Beta > 1: More volatile than market (e.g., tech stocks, small caps)
- Beta < 1: Less volatile than market (e.g., utilities, consumer staples)
- Beta < 0: Moves opposite to market (e.g., gold, inverse ETFs)
Practical Applications
- Portfolio Construction: Blend high-beta and low-beta stocks to achieve your target portfolio beta
- CAPM Expected Returns: Calculate expected return using E(Ri) = Rf + Beta x (Rm - Rf)
- Risk Budgeting: Allocate more to low-beta assets for conservative portfolios
- Sector Analysis: Compare companies within the same sector on a risk-adjusted basis
Limitations of Beta
Important: Beta has limitations that investors should understand.
- Backward-looking: Beta is calculated from historical data and may not predict future volatility
- Time-period sensitive: Different calculation periods can give different beta values
- Market-specific: Beta depends on which index you use as the market proxy
- Not total risk: Only measures systematic risk, ignores company-specific factors
Frequently Asked Questions
Beta measures a stock's systematic risk - how much it moves relative to the overall market. A beta of 1 means the stock moves with the market, beta > 1 means more volatile than the market, and beta < 1 means less volatile. For example, a stock with beta of 1.5 would be expected to rise 15% when the market rises 10%.
Beta can be calculated two ways: (1) Using correlation and standard deviations: Beta = Correlation x (Asset Std Dev / Market Std Dev), or (2) Using covariance and variance: Beta = Covariance(Asset, Market) / Variance(Market). Both methods give the same result when using consistent data.
There is no universally "good" beta - it depends on your investment goals. Conservative investors often prefer beta < 1 (defensive stocks like utilities). Aggressive investors seeking higher returns may prefer beta > 1 (growth stocks, tech). Beta around 1 provides market-like returns and risk.
A beta of 1.5 means the stock is 50% more volatile than the market. If the market rises 10%, the stock would be expected to rise 15%. Conversely, if the market falls 10%, the stock would be expected to fall 15%. Higher beta means higher potential returns but also higher risk.
Negative beta means the asset moves opposite to the market. When the market goes up, a negative beta asset tends to go down, and vice versa. Examples include gold, inverse ETFs, and some utility stocks. Negative beta assets can be useful for portfolio hedging.
Beta helps in portfolio construction by balancing risk. Combining high-beta and low-beta stocks creates a desired portfolio beta. Beta is also used in CAPM to calculate expected returns, set hurdle rates for investments, and compare stocks within the same sector on a risk-adjusted basis.
Disclaimer
This calculator is for educational and informational purposes only. Beta is calculated from historical data and may not predict future volatility. Beta values vary depending on the time period and market index used. Always consult with a qualified financial advisor before making investment decisions.
