* By submitting your email address, you consent to receive email messages (including discounts and newsletters) regarding Corporate Finance Institute and its products and services and other matters (including the products and services of Corporate Finance Institute's affiliates and other organizations). A beta may produce different results because of the variations in estimating it, such as different time spans used to calculate data. Beta Distribution calculator can calculate probability more than or less than values or between a … CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security). In our example, we will use Apple (AAPL) as the stock under analysis and the S&P 500 as our historical index. Microsoft Excel serves as a tool to quickly organize data and calculate beta. A company with a higher beta has greater risk and also greater expected returns. where Γ is the gamma function. Low beta stocks are less volatile than high beta stocks and offer more protection during turbulent times. Free business templates to use in your personal or professional life. Follow these steps to calculate β in Excel: For more resources, check out our business templates library to download numerous free Excel modeling, PowerPoint presentation, and Word document templates. The Excel formulas that calculate the PDF and CDF of the beta distribution have optional inputs that enable the [0, 1] interval to be expanded to an arbitrary width. The function was first introduced in Excel 2010 and so is not available in earlier versions of Excel. BETA FORMULA = COVAR (D1: D749; E1: E749) / VAR (E1: E749). The beta (β) of an investment security (i.e. Become a certified Financial Modeling and Valuation Analyst (FMVA)®FMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari by completing CFI’s online financial modeling classes and training program! It is used in the capital asset pricing model. Such investors would 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. A beta may produce different results because of the variations in estimating it, such as different time spans used to calculate data. This beta calculator allows you to measure the volatility of returns of an individual stock relative to the entire market. a stock) is a measurement of its volatility of returns relative to the entire market. The beta of Portfolio = Weight of Stock * Beta of Stock + Weight of Stock * Beta of Stock…so on Let us see an example to calculate the same. There are then two ways to determine beta. This is because there are several ways to estimate beta. 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. The price-to-earnings ratio (P/E ratio) is defined as a ratio for valuing a company that measures its current share price relative to its per-share earnings. The S&P 500 High Beta Index is the most well-known of these indexes. Viewing if the distribution fits a particular case better than the normal distribution. Follow these steps to calculate β in Excel: Obtain the weekly prices of the stock; Obtain the weekly prices of the market index (i.e. The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's expectation of 30-day volatility. Therefore, incorporating low beta stocks versus higher beta stocks could serve as a form of downside protection in times of adverse market conditions. Employing beta strategies can be useful as part of a broader investment plan to limit downside risk or realize short-term gains, but it's important to remember that it is also subject to the same levels of market volatility as any other trading strategy. Download the free Excel template now to advance your finance knowledge! At first, we only consider the values of the last three years (about 750 days of trading) and a formula in Excel, to calculate beta. If the opposite is the case, its beta will be a value less than one. Beta Distribution Calculator. Volatility measures how much the price of a security, derivative, or index fluctuates. Beta is a measure of how sensitive a firm's stock price is to an index or benchmark. In particular, the conditional distribution of x, conditional on having observed k successes out of n trials, is a Beta distribution with parameters k+1 and n-k+1. βa=Cov(ra,rb)Var(rb)\begin{aligned} &\beta_a = \frac { \text{Cov} ( r_a, r_b ) }{ \text{Var} ( r_b ) } \\ \end{aligned}βa=Var(rb)Cov(ra,rb). Peering through Yahoo (YHOO) Finance, Google (GOOG) Finance, or other financial data feeders, one may see a variable called beta amid other financial data, such as stock price or market value. S&P 500 Index), Calculate the weekly returns of the stock, Calculate the weekly returns of the market index, Use the Slope function and select the weekly returns of the market and the stock – each as their own series, The output from the Slope function is the β. Excel Functions: Excel provides the following functions: BETA.DIST (x, α, β, cum) = the pdf of the beta function f (x) when cum = FALSE and the corresponding cumulative distribution function F (x) when cum = TRUE. Those two extra years may be the cause of two vastly different results. It is important to follow strict trading strategies and rules and apply a long-term money management discipline in all beta cases. Google Finance provides a beta for this company of 5.48, which means that with respect to the historical variations of the stock compared to the Standard & Poor's 500, US CORP increased on average by 5.48% if the S&P 500 rose by 1%. Comment/Request Increase amount of possible repetitions. As part of those collapses, low beta stocks dove down much less than higher beta stocks during periods of market turbulence. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This is because their market correlation was much lower, and thus the swings orchestrated through the index were not felt as acutely for those low beta stocks. The Capital Asset Pricing Model is a model that describes the relationship between risk and expected return. The mathematical formulation for the beta distribution is complex and generally it depends on two parameters alpha and beta. Generally, the index of one is selected for the market index, and if the stock behaved with more volatility than the market, its beta value will be greater than one. CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security, Download free financial model templates - CFI's spreadsheet library includes a 3 statement financial model template, DCF model, debt schedule, depreciation schedule, capital expenditures, interest, budgets, expenses, forecasting, charts, graphs, timetables, valuation, comparable company analysis, more Excel templates. S&P 500 Index) Calculate the weekly returns of the stock; Calculate … A beta greater than 1 indicates that the firm's stock price is more volatile than the market, and a beta less than 1 indicates that the firm's stock price is less volatile than the market. Yahoo! How To Cite. We used Accord.Statistics for this calculator. Low beta stocks are much less volatile; however, another analysis must be done with intra-industry factors in mind. To do so, we first add two columns to our spreadsheet; one with the index return r (daily in our case), (column D in Excel), and with the performance of Apple stock (column E in Excel). However, there are always exceptions given the industry or sectors of low beta stocks, and so, they might have a low beta with the index but a high beta within their sector or industry. Many investors found themselves with heavy losing positions as part of the Global Financial Crisis that began in 2007. With Excel, we can 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: Here, we have just computed a beta value for Apple's stock (0.77 in our example, taking daily data and an estimated period of three years, from April 9, 2012, to April 9, 2015).