Items you will need
- Risk-free rate of return, in decimal format
- Market rate premium, in decimal format
- Required rate of return, in decimal format
Beta, as a financial measure, is a statistic that describes a stock's volatility in relation to the stock market. It is a measure of investment risk, as it will tell you how much more (or less) the stock may move in relation to its peers within the stock market. While you can reduce the risk of your portfolio through diversification, there are certain types of risk, known as systemic risk, that can alter the value of your investment. Systemic risk relates to all types of stocks or investments within a particular industry or market, and cannot be eliminated through portfolio diversification.
Calculate your required rate of return, based on your other investments and the investing period. This number should be a decimal, such as .05 for 5 percent or .15 for 15 percent, but will vary based on your personal situation.
Calculate the risk-free rate, usually set as the amount of a similar-term Treasury bond.
Calculate the market rate premium. The market risk premium is the difference between the market's rate of return (such as the NYSE or NASDAQ index) and the risk-free rate of return.
Calculate beta by subtracting the risk-free rate from the required rate of return. Divide this result by the market rate premium. The resultant number is the asset's beta.
A beta value above 1.0 means the investment in question is regarded as more volatile than the stock market. A beta below 1.0 means the investment in question is regarded as less volatile and less risky than the stock market as a whole.
While a higher-risk stock may mean a higher return, it may not be a good fit for your portfolio. If a stock appears to be too volatile for you to have among your investments, you should perhaps reconsider whether it is a good idea to pursue it. Due to the higher risk expectations of such an investment, you might not be able to afford it.
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