# Beta Calculator

## Beta

It is also termed as a beta coefficient. It is a measure of the risk of a stock or portfolio in comparison to the market risk. The CAPM (Capital Asset Pricing Model) uses the beta coefficient. It only takes systematic risk into account. Beta Calculator helps in making calculations easier.

Since the systematic risk, or we can say non-diversifiable risk, is related to the whole economy and not to a specific industry. And hence, we cannot avoid it. But there are certain methods such as asset allocation or hedging to reduce this risk. Examples of systematic risk include tax reforms, flight of capital, interest rate hikes, etc. So, beta helps in computing and assessing the risk of a particular stock or portfolio in comparison to the market.

## Formula

To calculate the beta of a security or portfolio, we divide covariance between the return of security and market return by the variance of the market return.

The formula of beta is as follows:

Beta = Covariance (rs, rm) / Variance (rm)

Where,

rs = Return on Security

rm = Market Return

## About the Calculator / Features

The beta calculator is an easy-to-go online tool that quickly calculates Beta Coefficient by simply inserting the following figures into it:

• Covariance (rs, rm)
• Variance (rm)

## How to Calculate using Beta Calculator

The user is required to simply insert the following details into the calculator for the quick result of the calculation.

### Covariance

A covariance is a tool for measuring the statistical relationships between two different variables. The result of covariance lies between -∞ to +∞. This means that the covariance can be negative as well. A negative covariance determines that the movement is in the opposite direction, while a positive covariance defines movement in the same direction. It is denoted as CoV in short. The formula for calculating Covariance is as follows:

Covariance = ∑ (xi – x̄) (yi – ȳ) / (n – 1)

Where, x & y = data value of x & y respectively.

x̄ = Average of data values of x

ȳ = Average of data values of y

n = number of data values

### Variance

Variance can be defined as the square of standard deviation. It is denoted as (σ2). It is the total of each value in the data set subtracted by the average of the data set and divided by the total numbers in the data set less one. The variance can be calculated by using the following formula:

Variance = ∑ (xi – x̄)2 / (n – 1)

## Example of Beta

An example would help in providing more clarity on the concept.

Suppose an investor wants to calculate and compare the Beta of X Ltd. and Y Ltd. Variance of X Ltd. is 0.0085, while the variance of Y Ltd. is 0.0075.

Beta of X Ltd. = 0.0085 / 0.0075 = 1.133

## Interpretation

Beta signifies the change for every 1% in one variable causing the change in another variable. In the example above, the security of X Ltd. is 13.33% riskier than the security of Y Ltd.

## Cautions

The beta coefficient is reliable only in the case of stocks whose trade occurs more frequently. It is useful in the short run only. The investors investing, in the long run, may not consider it.

## RELATED POSTS ## Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".