How to Calculate Beta in Excel (2024)

Financial feeds like YahooFinance and Google Finance commonly list betaamid other financial data, such as stock price or market value. The beta refers to the sensitivity of the share price to an index or benchmark.

What Is Beta?

An index of 1.0 is commonly selected as the benchmark for a market index like the S&P 500 index. If a stock behaves more volatile than the market, its beta value will be greater than one.A companywith a beta greater than one will tend to amplify market movements. If the opposite is true, its beta will be lessthan one.A business with a beta of less than onewill tend to ease market movements.

Beta can be seen asa measure of risk. The higher the beta, the higher the expected return to compensate for the excess risk caused by volatility. From a portfolio management or investment perspective, investors analyze anymeasures ofrisk associated with a company to estimate expectedreturn.

Methodology

The beta value provided on Google Finance may differ from the beta on Yahoo Finance orReuters because of the various ways to estimate beta. Multiple factors, such as the time duration of the period, are included in the computation of the beta, which creates varying results. Some calculations base their data on three years, while others may use a five-year time horizon.

Calculating Beta

It's simple to calculate the beta coefficient over a certain period. The beta coefficientneeds a historical series of share prices for the company that is analyzed.In this historical example, Apple (AAPL) stock prices are used from 2012 through 2015 with the S&P 500 as the historical index found at:

Yahoo! Finance –> Historical prices, and download the time series "Adj Close" for the S&P500 and the firm Apple.

The downloaded data from the S&P 500 will populate Excel as:

The downloaded data for Apple will appear in Excel as:

Formulas

The Excel table will download and the data can be reduced to three columns:

• Date
• Applestock price
• Price of the S&P500

There are two ways to determine beta. The first is to use the formula for beta, which is calculated as the covariance between the return (r_a)of the stock and the return (r_b) of the index divided by the variance of the index over three years.

$\begin{aligned} &\beta_a = \frac { \text{Cov} ( r_a, r_b ) }{ \text{Var} ( r_b ) } \\ \end{aligned}$​βa​=Var(rb​)Cov(ra​,rb​)​​

First, add two columns to the spreadsheet: one with the index return r (daily in our case), (column E in Excel), and one with the performance of Apple stock (column D in Excel). The example considers the values ​​of the last three years (about 750 days of trading) and a formula in Excel, to calculate beta.

BETAFORMULA= COVAR (D1: D749; E1: E749) / VAR (E1: E749)

The second method is to perform a linear regression, with the dependent variable performance of Apple stock over the last three years as an explanatory variable and the performance of the index over the same period.

With the results of the regression, the coefficient of the explanatory variable is thebeta(the covariance divided by variance).

Using Excel, pick a cell and enter the formula: "SLOPE" which represents the linear regression applied between the two variables; the first for the series of daily returns of Apple (here: 750 periods), and the second for the daily performance series of the index, which follows the formula:

BETAFORMULA = SLOPE (E1: E749; D1:D749)

This computes a beta value for Apple's stock (0.77 in the example, taking daily data and an estimated period of three years, from April 9, 2012, to April 9, 2015).

LowBeta vs. HighBeta

For investors, incorporating low-betastocks versushigher-betastocks couldserve as a form ofdownside protectionin times of adversemarket conditions. Low beta stocks are much less volatile, but intra-industry factors should be considered.

Higher betastocks are commonly selected by investors who are keen and focused on short-term market swings. They wish to turn this volatility into profit, albeit with higher risks. Such investorswould select stocks with a higher beta, which offer more ups and downs and entry points for trades than stocks with lower beta and lower volatility.

The Bottom Line

Investors should follow strict trading strategies and rules and apply a long-term money management discipline in all beta cases. Employing beta strategiescan be usedas part of a broader investment plan to limit downside risk or realize short-term gains, but also subject to the same levels of market volatility as any other trading strategy.