Beta is an important parameter that investors must take into consideration before buying any stock, mutual fund, or any similar financial instrument. It measures the volatility of an instrument against a benchmark and therefore helps assess the risk factor of your investment. In this post, we’ll learn a step-by-step process for stock beta calculation in a spreadsheet. The read-only version of the spreadsheet is available for you to access free of cost from the end of this post.
Stock Beta Overview
Investing in stocks has a systematic risk associated with it as the markets do not move linearly. Since the stock market is volatile, it is important to know how much risk you are getting into before investing your hard-earned money. A metric known as “Beta” helps you measure this risk.
Beta is expressed as a numeric value, and if the value is greater than 1 it indicates the particular stock is more volatile and hence more “risky” as compared to the overall market. If you are looking for a long-term investment, it’s ideal to pick up stocks whose Beta is less than or equal to 1. However, if you are into stock options selling, it’s better to pick up stocks with high beta as premium decay may be faster for volatile stocks.
Stock Beta Calculation Formula
Beta is expressed as the covariance of the return of a stock divided by the variance of the return of the benchmark over a certain time period:
Beta = Covariance (Stock Return, Benchmark Return) / Variance (Benchmark Return)
Steps to calculate Stock Beta in a Spreadsheet
For this tutorial, we’ll use Google spreadsheet for stock beta calculation. Google spreadsheet allows you to fetch historical stock prices using the Google Finance function, and hence there is no manual work involved to operate this spreadsheet.
Let’s first look at the end state of the spreadsheet and then we can backtrack on how it was built:
Access to Spreadsheet
We hope you got a fair idea of stock beta calculation in a spreadsheet. You may access the spreadsheet using the below link: Please feel free to copy the spreadsheet and use it for your analysis.
We hope you got a fair idea of stock beta calculation in a spreadsheet. You may access the spreadsheet using the below link:
Please feel free to copy the spreadsheet and use it for your analysis.