Either or both of these values may be negative, meaning that investing in the stock or the market (index) as a whole would mean a loss during the period. If only one of the two rates is negative, the beta will be negative.
The beta of the market itself (or the appropriate index) is by definition 1. 0, as the market is being compared to itself, and any number (except zero) divided by itself equals 1. [3] X Research source A beta of less than 1 means that the stock is less volatile than the market as a whole, while a beta greater than 1 means the stock is more volatile than the market as a whole. The beta value can be less than zero, meaning either that the stock is losing money while the market as a whole is gaining (more likely) or that the stock is gaining while the market as a whole is losing money (less likely). When figuring beta, it is common, though not required, to use an index representative of the market in which the stock trades. For U. S. stocks, the S&P 500 is the index usually used,[4] X Research source although analysis of an industrial stock may be better served by comparing it against the Dow Jones Industrial Average. There are several other indexes that could be used appropriately. For stocks that trade internationally, the MSCI EAFE (representing Europe, Australasia, and the Far East) is a suitable representative index.
The higher the beta value for a stock, the higher its expected rate of return will be. However, this higher rate of return is coupled with an increased risk, making it necessary to look at the stock’s other fundamentals before considering whether it should be part of an investor’s portfolio. [6] X Research source
The longer time frame you choose, the more accurate your beta calculation will become. Historical beta changes as you monitor both the stock and the index for a longer time.
Since return is a calculation over time, you won’t put anything in your first cell; leave it blank. You need at least two data points to calculate returns, which is why you’ll start on the second cell of your index-returns column. What you’re doing is subtracting the more recent value from the older value and then dividing the result by the older value. This just gives you the percent of loss or gain for that period. Your equation for the returns column might look something like this: =(B4-B3)/B3
Choose a linear trendline, not a polynomial or moving average. Displaying the equation on the chart, as well as the R2 value, will depend on what version of Excel you have. Newer versions will let you graph the equation and the R2 value by clicking on the Chart Quick Layouts and finding the equation R2 value layout. In older versions of Excel, navigate to Chart → Add Trendline → Options. Then check both boxes next to “Display equation on chart” and “Display R2 value on chart,” respectively.
The R2 value is the relationship of variance of the stock returns to the variance of the overall market returns. A large number, . 869 for example, indicates a highly related variance between the two. A low number, . 253 for example, indicates a less- related variance between the two. [9] X Research source
Take this example: Say that the beta of Gino’s Germ Exterminator is calculated at . 5. Compared to the S&P 500, the benchmark to which Gino’s is being compared, it’s half as risky. If the S&P moves down 10%, Gino’s stock price will tend to fall only 5%. As another example, imagine that Frank’s Funeral Service has a beta of 1. 5 when compared to the S&P. If the S&P falls 10%, expect Frank’s stock price to fall more than the S&P, or about 15%.
For example, pretend Vermeer’s Venom Extraction has a beta of . 5. When the stock market jumps 30%, Vermeer’s only gains 15%. But when the stock market sheds 30%, Vermeer’s drops only 15%.
