How to Calculate Beta
What is Beta?
Beta measures security volatility relative to market: β > 1 more volatile than market, β < 1 less volatile, β = 1 matches market.
Step-by-Step Guide
- 1Calculate historical returns vs. market index
- 2Compute covariance of returns
- 3Divide by market variance
Worked Examples
Input
Tech stock β = 1.5
Result
50% more volatile than market
Higher risk/reward potential
Common Mistakes to Avoid
- ✕Assuming high β always risky (opportunity matters)
- ✕Using short lookback periods
Frequently Asked Questions
Should beta guide investment?
No alone; consider alpha (excess return), fundamentals, diversification.
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