Stock Beta Calculation

Stock beta calculation is used to calculate the volatility of a stock or security in comparison to the whole market. For instance, if you wish to invest in a particular stock you may be interested not just in how it is currently performing but also in how it has fared over the years. That information is likely to help you make a better informed decision. 

There are several ways in which you can calculate beta

#1. Using Historical Data - This can be done if you use the Bloomberg and Value Line data.

#2. Using Time Frame - This is when the stock comparison is made over a number of years say two to five years. Bloomberg uses a default of two years. Baseline and ValueLine use 5 years data and their data is updated weekly and quarterly respectively.

#3. Using An Index  - Most people use the S&P 500 Index. In fact, Bloomberg and Baseline use this method while ValueLine use the NYSE Index method.

#4. Using Calculations - This can be achieved by using a regression on the weekly prices for the stock or by using percentage of changes of the  index and stock and applying the formula to it.

The formula for the Beta of an asset within a portfolio is

where r_a measures the rate of return of the asset and r_p measures the rate of return of the portfolio of which the asset is a part.

So does calculation of beta for stock really represent the volatility of a stock? Perhaps not, although it is helpful in providing insight into the fluctuations in the return of stock vary with index. To really gauge the risk of a stock or portfolio, it's perhaps best to examine the volatility directly by looking into how much the value of the stock changes over the period of a month or more.

Further stock beta calculation information.