How to Calculate Beta Essay

How to Calculate Beta Beta refers to the volatility of a particular song compared against the volatility of the entire job market or, in practice, a proxy index of that market, such as the Standard and Poors (S adenylic acidP) 500. Beta is an indicator of how risky a particular carry is and is use to evaluate its pass judgment pace of present. Beta is one of the fundamentals stemma analysts consider when choosing linages for their portfolios, along with price-to-earnings ratio, shareholders equity, debt-to-equity ratio and other factors. here(predicate)s how to calculate beta and use beta to figure an expected rate of return.This is the rate of return an investor could expect on an investment in which his or her money is not at risk, such as U. S. exchequer Bills for investments in U. S. dollars and German Government Bills for investments that trade in euros. This figure is usually expressed as a percentage.Determine the respective rates of return for the stock and for the market or congressman index. These figures are also expressed as percentages. Usually, the rates of return are figured over several months. * any or both of these values may be negative, meaning that invest in the stock or the market (index) as a unit of measurement would mean a loss against the investment during the period.Subtract the risk-free rate from the market (or index) rate of return. If the market or index rate of return is 8 percent and the risk-free rate is again 2 percent, the residuum would be 6 percent. Divide the difference in the stocks return rate minus the risk-free rate by the market (or index) rate of return minus the risk-free rate. This is the beta, which is typically expressed as a decimal value. In the example above, the beta would be 5 divided by 6, or 0. 833. * The beta of the market itself, or its representative index, is by definition 1. 0, as the market is being compared against itself and any nonzero turn divided by itself equals.A beta less than 1 office that the stock is less volatile than the market as a whole, plot of ground a beta greater than 1 means the stock is more volatile than the market as a whole. The beta value bear be less than zero, meaning either that the stock is losing money date the market as a whole is gaining (more likely) or that the stock is gaining trance 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 sually used, although an industrial stock may be better served by comparing it against the Dow Jones Industrial Average.