How is beta calculated in the CAPM?

Beta (β) is a measure of an asset’s volatility or sensitivity to market movements. It is calculated as the covariance between the asset’s returns and the market’s returns, divided by the variance of the market’s returns. In other words, beta measures the extent to which an asset’s returns move in line with the market’s returns.

The formula for calculating beta is as follows:

β = Cov(r,rm) / Var(rm)

where:

• r is the asset’s returns
• rm is the market’s returns

To calculate beta, you first need to collect historical data on the asset’s returns and the market’s returns (e.g., using daily or monthly returns over a certain time period). Then, you can use a statistical software program, such as Excel or R, to calculate the covariance and variance of the returns and plug the values into the formula above to obtain the beta.

Alternatively, beta values for publicly traded companies are often available through financial data providers or stock market websites.