Home
Back
Beta Formula:
| From: | To: |
The Beta (β) formula measures the volatility of an investment compared to the overall market. It calculates the covariance between asset returns and market returns divided by the variance of market returns, providing a measure of systematic risk.
The calculator uses the Beta formula:
Where:
Explanation: The formula quantifies how much an asset's price moves relative to market movements, with β > 1 indicating higher volatility than the market, and β < 1 indicating lower volatility.
Details: Beta is crucial for portfolio management, risk assessment, and capital asset pricing model (CAPM) applications. It helps investors understand an asset's risk profile relative to the market.
Tips: Enter comma-separated return values for both asset and market. Ensure both inputs have the same number of data points for accurate calculation.
Q1: What does a beta of 1.5 mean?
A: A beta of 1.5 means the asset is 50% more volatile than the market. If the market moves 1%, the asset tends to move 1.5%.
Q2: Can beta be negative?
A: Yes, negative beta indicates the asset moves in the opposite direction of the market, which is rare but possible for certain defensive assets.
Q3: What time period should be used for returns?
A: Typically, 3-5 years of monthly or weekly returns are used, but the period should match your investment horizon and analysis needs.
Q4: How does beta relate to diversification?
A: Assets with different betas can help diversify portfolio risk. Low or negative beta assets can reduce overall portfolio volatility.
Q5: What are the limitations of beta?
A: Beta assumes past volatility patterns will continue, doesn't account for new information, and may not accurately predict future risk in changing market conditions.