1. What is Beta?

Beta (β) is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. It's a key component in the Capital Asset Pricing Model (CAPM).

2. How Does the Calculator Work?

The calculator uses the Beta formula:

Where:

• \( \text{Covariance(Asset, Market)} \) — Measures how changes in asset returns relate to changes in market returns
• \( \text{Variance(Market)} \) — Measures the spread of market returns around their average

Explanation: Beta essentially compares the asset's responsiveness to market movements.

3. Importance of Beta Calculation

Details: Beta helps investors understand a stock's risk profile. A beta greater than 1 indicates higher volatility than the market, while less than 1 indicates lower volatility.

4. Using the Calculator

Tips: Enter the covariance between the asset and market returns, and the variance of market returns. Both values should be calculated from the same time period.

5. Frequently Asked Questions (FAQ)

Q1: What does a beta of 1.5 mean?
A: A beta of 1.5 means the asset is theoretically 50% more volatile than the market. It tends to move 1.5 times the market movement.

Q2: Can beta be negative?
A: Yes, negative beta means the asset moves inversely to the market, which is rare but possible (e.g., some gold stocks or inverse ETFs).

Q3: How is beta used in CAPM?
A: In CAPM, beta is used to calculate expected return: Expected Return = Risk-Free Rate + β × (Market Return - Risk-Free Rate).

Q4: What time period should be used to calculate beta?
A: Typically 3-5 years of monthly returns are used, but this can vary based on investment horizon and asset characteristics.

Q5: What are limitations of beta?
A: Beta assumes past price movements predict future risk, doesn't account for new information, and may not work well for assets with non-normal return distributions.