Beta
or….
“What Is Beta and How Is It
Calculated?”
Beta

A “coefficient measuring a stock’s relative
volatility”

Beta measures a stock’s sensitivity to
overall market movements
Source:UBS Warburg Dictionary of Finance and Investment Terms

In practice, Beta is measured by comparing
changes in a stock price to changes in the
value of the S&P 500 index over a given
time period

The S&P 500 index has a beta of 1
A Generic Example

Stock XYZ has a beta of 2

The S&P 500 index increases in value by
10%

The price of XYZ is expected to increase
20% over the same time period
Beta can be Negative

Stock XYZ has a beta of –2

The S&P 500 index INCREASES in value
by 10%

The price of XYZ is expected to
DECREASE 20% over the same time
period

If the beta of XYZ is 1.5 …

And the S&P increases in value by 10%

The price of XYZ is expected to increase
15%

A beta of 0 indicates that changes in the
market index cannot be used to predict
changes in the price of the stock

The company’s stock price has no
correlation to movments in the market index
Company
Beta
AMGN
BRK.B
C
XOM
MSFT
MWD
NOK
PXLW
TXN
VIA.B
0.82
0.73
1.37
0.10
1.80
2.19
2.05
1.93
1.70
1.39
Source: taken from yahoo.finance.com, except PXLW from
Beta and Risk

Beta is a measure of volatility

Volatility is associated with risk
Risk-Reward Curve
Risk
Expected Return

If beta is a measure of risk, then investors
who hold stocks with higher betas should
expect a higher return for taking on that risk

What does this remind you of?
Beta and CAPM
The capital asset pricing model:
E(R) = Rf + B(Rm-Rf)
where:
E(R) = Expected return
Rf = risk free rate of return
B = beta
Rm = market return
WACC
Weighted average cost of capital:
WACC = (D/V)*Rd*(1-T) + (E/V)*Re
where:
D = market value of firm’s debt
Rd = return on debt securities
T = tax rate
E = market value of firm’s equity securities
Re = return on equity securities (from CAPM)
V = total value of firm’s securities (D + V)
WACC and Beta
WACC increases as the beta and the rate of
return on the equity securities increases (all
else constant)
 WACC is used as the discount rate in DCF
models
 Therefore, increasing WACC reduces the
firms valuation to reflect the increase in risk

How to Calculate Beta
Beta = Covariance(stock price, market index)
Variance(market index)
**When calculating, you must compare the
percent change in the stock price to the
percent change in the market index**
How to Calculate Beta
Easily calculated using Excel and Yahoo!
Finance
 Use COVAR and VARP worksheet
functions
 An example:
Calculate the beta of Citigroup stock over
the 5-yr time period from Jan. 1, 1997 –
Dec. 31, 2001

S&P 500 Adjusted Daily Closing
Values: January 1, 1997 December 31, 1997
Citigroup Adjusted Daily Closing
Prices: January 1, 1997 December 31, 1997