BETA FORMULA = COVAR (D1: D749; E1: E749) / VAR (E1: E749). Therefore, incorporating low beta stocks versus higher beta stocks could serve as a form of downside protection in times of adverse market conditions. A beta may produce different results because of the variations in estimating it, such as different time spans used to calculate data. Figure 1 – Beta Distribution. Comment/Request Increase amount of possible repetitions. Incidentally, it is important to differentiate the reasons why the beta value that is provided on Google Finance may be different from the beta on Yahoo Finance or Reuters. They wish to turn this volatility into profit, albeit with higher risks. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model (CAPMCapital Asset Pricing Model (CAPM)The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of a security. As part of those collapses, low beta stocks dove down much less than higher beta stocks during periods of market turbulence. βa=Cov(ra,rb)Var(rb)\begin{aligned} &\beta_a = \frac { \text{Cov} ( r_a, r_b ) }{ \text{Var} ( r_b ) } \\ \end{aligned}βa=Var(rb)Cov(ra,rb). You may withdraw your consent at any time. Therefore, the idea is to select the same beta methodology when comparing different stocks. The second method is to perform a linear regression, with the dependent variable performance of Apple stock over the last three years as an explanatory variable and the performance of the index over the same period. A company with a higher beta has greater risk and also greater expected returns. For example, some calculations base their data on a three-year span, while others may use a five-year time horizon. In our example, we will use Apple (AAPL) as the stock under analysis and the S&P 500 as our historical index. The first is to use the formula for beta, which is calculated as the covariance between the return (ra) of the stock and the return (rb) of the index divided by the variance of the index (over a period of three years). Beta is a measure of how sensitive a firm's stock price is to an index or benchmark. It is an online tool for calculating the probability using Beta Distribution. The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's expectation of 30-day volatility. There are then two ways to determine beta. Download the free Excel template now to advance your finance knowledge! For example, consider the hypothetical firm US CORP (USCS). The Capital Asset Pricing Model is a model that describes the relationship between risk and expected return. The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of a security. An investor has a portfolio of $100,000, the market value of HCL is $40,000 with a Beta value of HCL is 1.20, and market value of Facebook is $60,000 with Beta value is 1.50. CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security, Download free financial model templates - CFI's spreadsheet library includes a 3 statement financial model template, DCF model, debt schedule, depreciation schedule, capital expenditures, interest, budgets, expenses, forecasting, charts, graphs, timetables, valuation, comparable company analysis, more Excel templates. The function was first introduced in Excel 2010 and so is not available in earlier versions of Excel. Beta Distribution calculator can calculate probability more than or less than values or between a … Microsoft Excel serves as a tool to quickly organize data and calculate beta. Finance –> Historical prices, and download the. Beta Distribution Calculator. Many investors found themselves with heavy losing positions as part of the Global Financial Crisis that began in 2007. At first, we only consider the values of the last three years (about 750 days of trading) and a formula in Excel, to calculate beta. A high beta index is a basket of stocks that exhibit greater volatility than a broader market index like the S&P 500. Become a certified Financial Modeling and Valuation Analyst (FMVA)®FMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari by completing CFI’s online financial modeling classes and training program! If the opposite is the case, its beta will be a value less than one. The beta distribution is defined on the interval [0,1] and is defined by two positive shape parameters α and β. Follow these steps to calculate β in Excel: For more resources, check out our business templates library to download numerous free Excel modeling, PowerPoint presentation, and Word document templates. Those two extra years may be the cause of two vastly different results. In particular, the conditional distribution of x, conditional on having observed k successes out of n trials, is a Beta distribution with parameters k+1 and n-k+1. Low beta stocks are less volatile than high beta stocks and offer more protection during turbulent times. The beta of Portfolio = Weight of Stock * Beta of Stock + Weight of Stock * Beta of Stock…so on Let us see an example to calculate the same. Multiple factors, such as the duration of the period taken into account, are included in the computation of the beta, which creates various results that could portray a different picture. This is because there are several ways to estimate beta. Generally, the index of one is selected for the market index, and if the stock behaved with more volatility than the market, its beta value will be greater than one. Below is a screenshot of the beta calculator: Enter your name and email in the form below and download the free template now! Free business templates to use in your personal or professional life. We used Accord.Statistics for this calculator. Conversely, when the S&P 500 is down 1%, US CORP Stock would tend to average a decline of 5.48%. Yahoo! It is important to follow strict trading strategies and rules and apply a long-term money management discipline in all beta cases. In finance, the beta of a firm refers to the sensitivity of its share price with respect to an index or benchmark. It's simple to calculate the beta coefficient. To do so, we first add two columns to our spreadsheet; one with the index return r (daily in our case), (column D in Excel), and with the performance of Apple stock (column E in Excel). A beta greater than 1 indicates that the firm's stock price is more volatile than the market, and a beta less than 1 indicates that the firm's stock price is less volatile than the market. This request for consent is made by Corporate Finance Institute, 801-750 W Pender Street, Vancouver, British Columbia, Canada V6C 2T8. The result of this calculation is a Beta distribution. Templates include Excel, Word, and PowerPoint. S&P 500 Index), Calculate the weekly returns of the stock, Calculate the weekly returns of the market index, Use the Slope function and select the weekly returns of the market and the stock – each as their own series, The output from the Slope function is the β. This beta calculator allows you to measure the volatility of returns of an individual stock relative to the entire market. Therefore, from a portfolio management or investment perspective, one wants to analyze any measures of risk associated with a company to gain a better estimation of its expected return. Peering through Yahoo (YHOO) Finance, Google (GOOG) Finance, or other financial data feeders, one may see a variable called beta amid other financial data, such as stock price or market value. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Volatility measures how much the price of a security, derivative, or index fluctuates. Follow these steps to calculate β in Excel: Obtain the weekly prices of the stock; Obtain the weekly prices of the market index (i.e. Beta can be seen as a measure of risk: the higher the beta of a company, the higher the expected return should be to compensate for the excess risk caused by volatility. It is used in the capital asset pricing model. The Excel Beta.Dist function calculates the cumulative beta distribution function or the probability density function of the Beta distribution, for a supplied set of parameters. Now that we have the results of our regression, the coefficient of the explanatory variable is our beta (the covariance divided by variance). With Excel, we can pick a cell and enter the formula: "SLOPE" which represents the linear regression applied between the two variables; the first for the series of daily returns of Apple (here: 750 periods), and the second for the daily performance series of the index, which follows the formula: Here, we have just computed a beta value for Apple's stock (0.77 in our example, taking daily data and an estimated period of three years, from April 9, 2012, to April 9, 2015).