What is Beta?
Beta measures a stock's sensitivity to market movements, specifically how much the stock moves for every 1% move in a benchmark index (typically the S&P 500). A Beta of 1.0 means the stock moves in line with the market. Beta > 1 means amplified moves (more volatile than market); Beta < 1 means muted moves (more stable). Negative Beta means the stock moves opposite to the market, which is rare but seen in some commodity stocks or inverse ETFs. Beta is a key input in the Capital Asset Pricing Model (CAPM) and is used in portfolio construction to manage market exposure. Betas are typically estimated from 2-5 years of monthly returns.
Formula
Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns)
Beta = Correlation(Stock, Market) × (σ_Stock / σ_Market)
σ_Stock = annualised standard deviation of stock returns
σ_Market = annualised standard deviation of market returns
Calculator
How to Use
- 1Gather return series: Collect monthly returns for the stock and the S&P 500 over 2-5 years. More periods = more stable estimate.
- 2Compute covariance: Average of [(Stock_r − avg_Stock) × (Market_r − avg_Market)] across all periods.
- 3Compute market variance: Average of [(Market_r − avg_Market)²]. Divide covariance by variance to get Beta.
- 4Interpret: Beta > 1.5: high risk cyclical (semis, energy). Beta 0.5-1: defensive (utilities, consumer staples). Beta ≈ 1: market-like.
Worked Example
Example: Tech stock vs S&P 500
Covariance
0.0024
Market Variance
0.0016
Beta = 0.0024 / 0.0016 = 1.50. This stock moves 1.5× the market on average. A 10% market decline would correspond to a ~15% decline in this stock. For a $100,000 position, a 10% market drawdown produces a ~$15,000 loss, significantly more than a market-weight position.