Beta

or. What Is Beta and How Is It Calculated?

Beta

A coefficient measuring a stocks relati e olatilit! Beta measures a stocks sensiti it! to o erall market mo ements

"ource#$B" War%urg &ictionar! of 'inance and In estment (erms

In )ractice* Beta is measured %! com)aring changes in a stock )rice to changes in the alue of the "+, -.. inde/ o er a gi en time )eriod (he "+, -.. inde/ has a %eta of 0

A 1eneric 2/am)le

"tock 345 has a %eta of 6 (he "+, -.. inde/ increases in alue %! 0.7 (he )rice of 345 is e/)ected to increase 6.7 o er the same time )eriod

Beta can %e 8egati e

"tock 345 has a %eta of 96 (he "+, -.. inde/ I8C:2A"2" in alue %! 0.7 (he )rice of 345 is e/)ected to &2C:2A"2 6.7 o er the same time )eriod

If the %eta of 345 is 0.- And the "+, increases in alue %! 0.7 (he )rice of 345 is e/)ected to increase 0-7

A %eta of . indicates that changes in the market inde/ cannot %e used to )redict changes in the )rice of the stock (he com)an!s stock )rice has no correlation to mo ments in the market inde/

Com)an! A;18 B:=.B C 3@; ;"'( ;W& 8@= ,3BW (38 CIA.B

Beta ..<6 ..>? 0.?> ..0. 0.<. 6.0A 6..0.A? 0.>. 0.?A

"ource# taken from !ahoo.finance.com* e/ce)t ,3BW from

Beta and :isk

Beta is a measure of olatilit! Colatilit! is associated with risk

:iskD:eward Cur e
:isk

2/)ected :eturn

If %eta is a measure of risk* then in estors who hold stocks with higher %etas should e/)ect a higher return for taking on that risk What does this remind !ou of?

Beta and CA,;

(he ca)ital asset )ricing model# 2E:F G :f H BE:mD:fF where# 2E:F G 2/)ected return :f G risk free rate of return B G %eta :m G market return

WACC
Weighted a erage cost of ca)ital# WACC G E&ICFJ:dJE0D(F H E2ICFJ:e where# & G market alue of firms de%t :d G return on de%t securities ( G ta/ rate 2 G market alue of firms eKuit! securities :e G return on eKuit! securities Efrom CA,;F

WACC and Beta

WACC increases as the %eta and the rate of return on the eKuit! securities increases Eall else constantF WACC is used as the discount rate in &C' models (herefore* increasing WACC reduces the firms aluation to reflect the increase in risk

How to Calculate Beta

Beta G Co arianceEstock )rice* market inde/F CarianceEmarket inde/F JJWhen calculating* !ou must com)are the )ercent change in the stock )rice to the )ercent change in the market inde/JJ

How to Calculate Beta

2asil! calculated using 2/cel and 4ahooL 'inance $se C@CA: and CA:, worksheet functions An e/am)le# Calculate the %eta of Citigrou) stock o er the -D!r time )eriod from Man. 0* 0AA> 9 &ec. ?0* 6..0

"+, -.. AdNusted &ail! Closing Calu

Citigrou) AdNusted &ail! Closing ,rices# Manuar Manua