How To Calculate Beta For Stock?

Short tutorial on how to calculate beta for stock.

Calculating Beta

Beta is a measure of fluctuations of a stock to changes in the overall stock market. It is a numerical quantity. Beta is the best indicator of how risky the particular stock is. The value is also used to evaluate the expected rate of return of the stock.

In this short tutorial we shall discuss on how to calculate beta for a particular stock using a simpe example explained neatly with pictures.
How To Calculate Beta
Formula Used:

Beta = (Stocks Rate of Return - Risk Free Rate) / (Market Rate of Return - Risk Free Rate)
Conditions:
If Beta is < 1, then the stock is less volatile that the market as the whole.
If Beta is > 1, then the stock is more volatile that the market as the whole.
If Beta is < 0, then the stock is losing money while the market as a whole is gaining
Beta Formula
Consider an example, where the risk free rate of the stock is 3% and the stocks rate of return is 8% and the market rate of return is 10%. Calculate beta value of the stock.

Step 1: Given,
Risk Free Rate = 3%
Stocks Rate of Return = 8%
Market Rate of Return = 10%
Calculate Beta Example
Step 2:
Subtract Risk Free Rate from Stocks Rate of Return
Stocks Rate of Return - Risk Free Rate = 8% - 3% = 5%
Calculate Beta Risk Free Rate Stock Rate Of Return
Step 3:
Subtract Risk Free Rate from Market Rate of Return
Market Rate of Return - Risk Free Rate = 10% - 3% = 7%
Calculate Beta Subtract Risk Free Rate From Market Rate Of Return
Step 4:
Calculate Beta
Substituting the values in the formula,
Beta = (Stocks Rate of Return - Risk Free Rate) / (Market Rate of Return - Risk Free Rate)
Beta = 5 / 7
Beta = 0.71
Here, the the stock is less volatile that the market as the whole.
Calculating Beta


Related Topics