Enter the covariance and the variance of a stock into the calculator to determine the beta of the stock in the portfolio.
Beta Portfolio Formula
The following formula is used to calculate a beta portfolio.
B = C / V
- Where B is the beta
- C is the covariance
- V is the variance
Portfolio Beta Definition
A portfolio beta is defined as the ratio of the covariance to the variance of an individual stock or portfolio compared to the overall market. The higher the beta the higher the possible return but the higher the risk.
What is covariance in beta?
A covariance in the case of a portfolio beta is defined as the measure of the stocks return relative to the stock market. So if the stock returns 10% and the market returns 8% during the same time period, the covariance would be 2%.
What is variance in beta?
A variance in terms of portfolio beta is a measure of the return of the market compared to it’s mean. So if the market returns a 8% for the period, but the average return is 6% for that time frame, then the variance would be 2%.
When should beta be used?
Beta should be used when analyzing short term risks of stocks and portfolios. This is because it’s a metric for understanding relative possible short term return and volatility. When considering longer term investments, big picture fundamentals are more important.
How to calculate portfolio beta?
- First, determine the covariance of the stock relative to the market.
- Next, determine the variance of the stock or market relative to it’s own average return.
- Finally, calculate the beta using the formula above.