Beta

T

tr222

How is a stocks Beta computed? Specifically what time period is used and what is it compared to? Are all stocks compared to the same index (and which one) or are different stocks compared to different indexes. For example a gold company to a gold index.
 
If the market is up 1% for the day can it be assumed that a stock with a beta of 2 would then be up 2%. Is this the basic theory of beta. I know that this isn't how it will work out but is the principle that beta is the magnitude of how a stock tracks the market.
How about a stock that always does the opposite to the market. The market goes up 1% but the stock drops 2%. What would beta look like for that?

Is beta basically a measure of how much a stock copies (higher beta) or doesn't copy (lower beta) the markets movement.
 
A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Conversely, if an ETF's beta is 0.65, it is theoretically 35% less volatile than the market. Therefore, the fund's excess return is expected to underperform the benchmark by 35% in up markets and outperform by 35% during down markets.

http://www.investopedia.com/terms/b/beta.asp
 
vanzandt said:
A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market.
More...

This is wrong. A security can be 10 times as volatile as the market, but will have β==0 if it's uncorrelated with the market.
 
here's using a pyton pandas dataframe

Code: 
def beta (dfpctchg,seriespctchg):
    """ dfpctchg : 2 column pctchange dataframe
        seriespctchg : series of second column

        In [32]: p.tail()
        Out[32]:
                    Adj_Close    Settle
        Date
        2014-12-09   0.002320  0.012182
        2014-12-10  -0.016204 -0.044076
        2014-12-11  -0.020392 -0.015860
        2014-12-12  -0.031225 -0.035056
        2014-12-15  -0.016529 -0.031336

        In [31]: p.cov() /  p.Settle.var()
        Out[31]:
                   Adj_Close    Settle
        Adj_Close   0.687536  0.479343
        Settle      0.479343  1.000000

        beta:   0.479343
    """
    return dfpctchg.cov() / seriespctchg.var()
 
Deuteronomy_24_7 said:
I don't follow. Does that make it less wrong? :confused:
More...
From Investopedia :

Beta
Loading the player...
What is 'Beta'

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.
Next Up

High Beta Index
International Beta
Unlevered Beta
Smart Beta ETF

BREAKING DOWN 'Beta'
Beta is calculated using regression analysis. Beta represents the tendency of a security's returns to respond to swings in the market. A security's beta is calculated by dividing the covariance the security's returns and the benchmark's returns by the variance of the benchmark's returns over a specified period.

Using Beta

A security's beta should only be used when a security has a high R-squared value in relation to the benchmark. The R-squared measures the percentage of a security's historical price movements that could be explained by movements in a benchmark index. For example, a gold exchange-traded fund (ETF), such as the SPDR Gold Shares, is tied to the performance of gold bullion. Consequently, a gold ETF would have a low beta and R-squared in relation to a benchmark equity index, such as the Standard & Poor's (S&P) 500 Index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, would increase the accuracy of the beta measurement.
Beta Interpretation

A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Conversely, if an ETF's beta is 0.65, it is theoretically 35% less volatile than the market. Therefore, the fund's excess return is expected to underperform the benchmark by 35% in up markets and outperform by 35% during down markets.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. For example, as of May 31, 2016, the PowerShares QQQ, an ETF tracking the Nasdaq-100 Index, has a trailing 15-year beta of 1.27 when measured against the S&P 500 Index, which is a commonly used equity market benchmark.
 
You must log in or register to reply here.
Back
Top