What is beta, and how is it calculated?

Beta is a measure of the volatility, or systematic risk, of an investment in comparison to the overall market. It is calculated by dividing the covariance of the investment’s returns with the market returns by the variance of the market returns.

A beta of 1 indicates that the investment’s returns move in the same direction and at the same rate as the market. A beta greater than 1 indicates that the investment is more volatile than the market, while a beta less than 1 indicates that the investment is less volatile than the market.

Beta can be calculated using the following formula:

Beta = Covariance (Return of Investment, Return of Market) / Variance (Return of Market)

where covariance is the measure of how much two variables move together, and variance is the measure of how much the returns of the market vary from their average.

Beta can also be calculated using regression analysis, which involves fitting a line to a scatter plot of the investment’s returns against the market’s returns. The slope of the line represents the beta of the investment. This method is often used in finance to estimate beta for publicly traded companies.