1. What is Beta Coefficient?

The Beta coefficient (β) measures the volatility of a stock or portfolio relative to the overall market. It quantifies systematic risk and indicates how much a security's price moves compared to market movements.

2. How Does the Calculator Work?

The calculator uses the Beta coefficient formula:

Where:

• \( \beta \) — Beta coefficient (unitless)
• \( \text{Cov} \) — Covariance between portfolio and market returns
• \( R_p \) — Portfolio return
• \( R_m \) — Market return
• \( \text{Var} \) — Variance of market returns

Explanation: Beta compares the covariance of a security's returns with market returns to the variance of market returns, measuring systematic risk exposure.

3. Importance of Beta Calculation

Details: Beta is crucial for portfolio management, risk assessment, and Capital Asset Pricing Model (CAPM) calculations. It helps investors understand a security's risk profile and expected returns.

4. Using the Calculator

Tips: Enter covariance and variance values. Both values must be valid (variance cannot be zero). The result is a unitless Beta coefficient.

5. Frequently Asked Questions (FAQ)

Q1: What do different Beta values mean?
A: β = 1 (moves with market), β > 1 (more volatile than market), β < 1 (less volatile than market), β = 0 (no correlation), β < 0 (moves opposite to market).

Q2: How is Beta used in CAPM?
A: In CAPM, Beta determines the risk premium: Expected Return = Risk-free Rate + β × (Market Return - Risk-free Rate).

Q3: What are typical Beta values for different sectors?
A: Utilities often have β < 1, technology stocks typically β > 1, while consumer staples usually have β around 1.

Q4: What are the limitations of Beta?
A: Beta assumes normal distribution, may not capture extreme events, and can change over time. It only measures systematic risk, not total risk.

Q5: How is covariance calculated?
A: Covariance = Σ[(R_p - Mean_p) × (R_m - Mean_m)] / (n-1) for sample data, using historical return data over a specific period.