Calculate a stock's beta from its historical returns and benchmark returns to measure systematic market risk.
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Risk Analysis
Beta measures a stock’s sensitivity to market movements. A beta of 1.5 means the stock historically moves 1.5% for every 1% move in the benchmark index.
Beta quantifies systematic risk — the portion of a stock’s volatility that comes from overall market movements rather than company-specific events. It is the key risk input in CAPM and is used in portfolio construction, hedging, and cost of equity estimation.
Defensive stocks (utilities, consumer staples) typically have betas below 1. Growth stocks and cyclicals tend to have betas above 1.
Beta is the ratio of covariance to variance.
β = Cov(Ri, Rm) / Var(Rm)
Ri = stock return, Rm = benchmark return. Equivalent to the slope of a simple linear regression of stock returns on market returns.
If a stock’s 12-month returns exactly double the benchmark returns, covariance equals 2× the benchmark variance, so beta = 2.0.
Beta is backward-looking — past sensitivity may not predict future sensitivity. It changes with the estimation window, return frequency, and benchmark choice. Beta does not capture tail risk or non-linear payoffs.
Frequently asked questions
At least 36–60 monthly observations or 2–5 years of weekly data. Shorter windows are noisier. Longer windows may include regime changes.
Use a broad market index relevant to the stock’s listing: S&P 500 for US large-caps, Russell 2000 for US small-caps, FTSE 100 for UK stocks, etc.
Yes. Gold mining stocks and certain hedge fund strategies occasionally show negative beta, meaning they tend to rise when the market falls. Negative-beta assets are valuable diversifiers.
Adjusted beta = (2/3 × Raw Beta) + (1/3 × 1.0). Bloomberg uses this to reflect the empirical tendency of betas to revert toward 1 over time.
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