How to Calculate Beta

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How to Calculate Beta

Beta refers to the volatility of a particular stock compared against the volatility of the entire stock market or, in practice, a representative index of that market, such as the Standard and Poor's (S&P) 500. Beta is an indicator of how risky a particular stock is and is used to evaluate its expected rate of return. Beta is one of the fundamentals stock analysts consider when choosing stocks for their portfolios, along with price-to-earnings ratio, shareholder's equity, debt-to-equity ratio and other factors. Here's how to calculate beta and use beta to figure an expected rate of return.

Calculating Beta for a Stock
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Find the risk-free rate. This is the rate of return an investor could expect on an investment in which his or her money is not at risk, such as U.S. Treasury Bills for investments in U.S. dollars and German Government Bills for investments that trade in euros. This figure is normally expressed as a percentage. -------------------------------------------------

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Determine the respective rates of return for the stock and for the market or representative index. These figures are also expressed as percentages. Usually, the rates of return are figured over several months. * Either or both of these values may be negative, meaning that investing in the stock or the market (index) as a whole would mean a loss against the investment during the period. If only 1 of the 2 rates is negative, the beta will be negative. 3....
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