Beta

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Beta

According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. A stock with a beta of 2 has returns that change, on average, by twice the magnitude of the overall market's returns; when the market's return falls or rises by 3%, the stock's return will fall or rise (respectively) by 6% on average.

https://www.stockopedia.com/ratios/beta-stock-5114/

Formulae of Beta

The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark divided by the variance of the return of the benchmark over a certain period.

Beta = Covariance / Variance
​where

• Variance - measure of a stock’s return relative to that of the benchmark.
• Covariance - measure of how the market moves relative to its mean.

Example 1,

Calculating the Beta for Apple Inc. (AAPL): An investor is looking to calculate the beta of Apple Inc. (AAPL) as compared to the SPDR S&P 500 ETF Trust (SPY). Based on data over the past five years, the correlation between AAPL, and SPY is 0.83. AAPL has a standard deviation of returns of 23.42% and SPY has a standard deviation of returns of 32.21%.

https://www.investopedia.com/investing/beta-know-risk/
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