What is Stock’s Beta Value?
In its simplistic form, beta is a measure of any individual stock’s risk (or movement) relative to the overall stock market risk (or movement). Since in Unites States, the overall stock market is represented by S&P500 index, Beta for individual stocks is measured relative to S&P500 index. Now, we can extend this relative measure to monthly returns (instead of price movements). If we compare the monthly return of individual stock to monthly return of S&P500 index, then it helps us put an expectation on our returns. How to calculate Beta? The formula for calculating Beta is written as: Beta = Covariance (stock vs. market returns) / Variance (market) Let us take an example, where we want to calculate the Beta for monthly returns (relative to market). We will calculate 10 year Beta for KMB. We will use a simple linear regression method that can be implemented using Microsoft’s Excel or Google’s spreadsheet. The spread sheet on this link shows the calculations. Step 1 (Column B): Download S
