How to Calculate Beta Using the Market Return

How to Calculate Beta Using the Market Return
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Beta is a measure of the relationship between an individual stock's return and the performance of the market. A beta value of two implies that the stock would rise or fall twice as much, in percentage terms, as the general market. Beta values below one imply that the stock moves up or down less than the index. High beta stocks are volatile and offer high risk as well as potentially high returns. Lower beta shares, on the other hand, are safer choices and more suited for risk averse investors.

Select a date range. The beta value will change depending on the time period over which it is calculated. Keep in mind that the longer the date range is, the more challenging the calculation will be if you are computing the figure manually. A very short horizon, while making the calculation easy, may produce an unreliable result, due to a lack of a sufficiently large sample. As a broad rule, three months is a good time horizon to work with.

Calculate daily percentage returns for the stock as well as the market for every day in your selected date range. The market returns are represented by the index. The daily return equals (price level of today - price level of yesterday) * 100/price level of yesterday.

Calculate the average return for the stock and the market. The average return is the sum of all daily returns divided by the number of days. If you have 100 days in your sample, add the daily returns for all of these days and divide the result by 100. Perform this procedure for both the market and the individual stock.

Calculate the difference between each day's return and the average return for both the stock and the market and multiply these differences. To do so, simply subtract the average daily stock return from the day's stock return; next, subtract the average market return from the daily market return and multiply the two figures. Repeat this procedure for every day and add all the results. Assume, for instance, that the market went up 1 percent per day on average while the stock went up 0.8 percent on average. On May 15, the market and stock went up 1.2 percent and 1.1 percent respectively. The result for the day is (1.2-1) * (1.1-0.8) = 0.06.

Calculate the square of the difference between average and daily returns for the market for each day and add up these values. In Step 4, you have already computed the difference between daily values of market return and average market return for each day. Now take the square of each daily figure and add up all these squares.

Divide the value calculated in Step 4 by the value calculated in Step 5. The result is the stock's beta value.