Beta Explained | American News
Beta is a measure of an asset’s risk relative to a benchmark, such as the stock market.
Beta calculates how an asset, such as a stock, performs relative to a larger market. As such, it offers insight into the volatility of the asset. A stock with a beta greater than 1 generally carries more risk and higher returns. A stock with a beta of less than 1 tends to carry less risk and lower returns. However, this does not only indicate volatility. It is possible for a volatile asset to have a beta of zero, indicating that it is lining up with the market.
The market or benchmark used to calculate an asset’s beta always has a beta of 1. Stocks that outperform the market have a beta greater than 1. Conversely, stocks that outperform below-market yield have a beta less than 1.
This number is not static nor does it provide a complete picture of the asset’s performance. An asset’s beta can change over time and can vary depending on what is happening in the market. At the same time, a company’s beta that doesn’t trade frequently can be skewed by outdated pricing information.
Understanding beta can help investors understand how volatility can affect their portfolio when making investment decisions. For example, if you have a higher risk tolerance, you might be willing to buy assets with a beta greater than 1 so you can capitalize on potential returns. On the other hand, you can choose stocks with a lower beta if you are concerned about market volatility.
To calculate the beta, divide the covariance of the expected asset return and the average expected market return by the variance of the expected market return. Although it is possible to calculate beta by hand, another option is to use the slope function in Excel. Enter the weekly or daily prices of the asset in one column and the corresponding reference prices in another column. Calculate the percent change for each range of numbers. Then apply the slope function to compare performance.
FAQs
Asset beta (also called unleveraged beta) refers to the comparison of a company that does not take its debt into account. This calculation always includes the company’s risk.