If you want to invest in the stock market, you need to be familiar with beta. This calculation tells you how much a particular stock moves compared to the rest of the market. In this guide, we will show you how to calculate beta in Excel for a stock. We will also provide an example so that you can see how it is done. Let's get started!
What is beta, and what does it measure?
Beta measures how closely a stock follows the overall market movements. A beta of 1 means that a stock moves with the market — up or down — in equal amounts. Anything above 1 is considered to be more volatile than the market, while anything below 1 is less volatile.
Beta is used to determine how risky an investment is. A higher beta means greater risk, while a lower beta indicates less risk. This is because stocks with a higher beta tend to be more volatile and thus have the potential for greater returns — but also greater losses. Whereas stocks with a lower beta are less volatile and thus have the potential for smaller returns — but also smaller losses.
The formula for beta is as follows:
Beta = (Covariance of Stock and Market Returns) / (Variance of Market Returns)
Covariance: is how two random variables move together
Variance: is how much a variable moves around its mean.
This is the most typical calculation performed to calculate the beta of a stock; however, often times another method known as the slope method is used.
Beta slope method formula:
Beta = SLOPE(range of % change of equity, range of % change of index).
Slope: how two variables move together. In other words, rise divided by run.
Range of % change of equity: is the percentage change of the particular stock you are analyzing (usually calculated monthly for a specific period like 5 years).
Range of % change of index: is the percentage change of the index you are comparing the stock against.
As you can see, these calculations are not the easiest to do by hand, but fortunately, you can use Excel to perform these calculations quickly and accurately.
How to calculate beta in Excel for a stock
Now that you understand how to calculate beta let's look at how to do it in Excel for a stock. We will start with the slope method because it is easier and faster.
Step 1: Gather data
The first step is to gather the necessary data. You will need the stock's daily (or monthly) closing prices for a certain period of time — usually 5-10 years. You can find this on financial websites or using a tool like Wisesheets.
For example by using the formula =WISEPRICE("AAPL", "close", 1825)
You will get Apple's close price for the past 5 years (365 days * 5) in a single function call.
You can do the same for the index except for substituting the ticker "AAPL" for "^GSPC" to get the data for the S&P500 index.
=WISEPRICE("^GSPC", "close", 1825)
This will provide you with the close price for both the index and the stock you are analyzing, which is all the data you need for the calculation.
Step 2: Enter data into Excel
Once you have the data, enter it into an Excel spreadsheet in two columns. In one column, enter the stock's daily closing prices for a period of time. In the other column, enter the index's daily closing prices for the same period.
If you follow the step above, you will have all the data ready to go.
Step 3: Calculate the percentage change for the stock and index
Now that you have entered your data calculate each column's percentage change. To do this, select a cell in one column and type "= (Cell A1 – Cell B1)/Cell B1".
This will give you the stock and index percentage change from day one to the next.
Step 4: Calculate beta
Now that you have calculated the percentage change for both columns, you can calculate the beta. To do this, select a cell and type =SLOPE(), and in the brackets, enter the range of percentage change for the stock and the index of your choice.
This will provide you the beta for the stock and index of your choice which in this case is equal to 1.20.
Variance and covariance method
If you would prefer to calculate the beta using variance and covariance, steps 1 through 3 remain the same as the slope method, but the last step uses a different formula.
Beta = (Covariance of Stock Returns and Market Returns) / (Variance of Market Returns)
To get the covariance, select a cell in an empty column and type "=COVARIANCE.P()"
Then enter the range of stock returns and market returns in the brackets. This will give you the covariance between the Stock Returns and Market Returns.
To get the variance, you can use the same formula but instead replace COVARIANCE with VAR.P
This will give you the variance of the Market Returns.
Finally, to get beta, all you need to do is divide the Covariance of Stock Returns and Market Returns by the Variance of Market Returns. The result is 1.20.
As you can see, both methods provide a stock's beta with a slight difference in the value due to the calculation differences.
Automatic beta in Excel for a stock
If you want to save yourself from the hassle of collecting the required data and automatically get a particular stock beta, there are two effective methods you can follow.
Use the GoogleFinance function or Excel Stocks
This will return the beta of a given stock automatically.
Excel stocks works very similarly where you can enter a list of stocks, navigate to the data tab, and click on stocks. From there, a window at the top right will appear where you can access beta as an attribute.
Similar to getting historical stock price data, you can get a stock or a list of stocks beta using the following function structure.
For example, you can see how you can get the beta value for a list of stocks in one function call.
Better yet, you can press the refresh button whenever you want to get the latest beta value.
How to interpret the results of a beta calculation?
When you have the beta value of a stock, how do you interpret it? A beta value of 1 means that the stock will move in tandem with the market. If the beta is higher than 1, it indicates that the stock's price movement is more volatile and is likely to be more sensitive to market movements. On the other hand, if the beta is lower than 1, it indicates that the stock's movements are less volatile and are not as sensitive to market movement.
The higher or lower the beta value is, the riskier it is to invest in that particular stock. So, when you calculate a stock's beta using Excel or any other method, it is essential to consider how risky the stock is before investing in it.
Calculating a stock's beta value in Excel is an essential part of making informed investment decisions. By following the steps discussed in this guide, you can easily calculate and interpret beta values for any stock you are interested in. Whether you use the slope method, the variance and covariance method, or use a specialized tool like Wisesheets or GoogleFinance, calculating beta in Excel is not that difficult. With this knowledge at hand, you can make more informed investment decisions and potentially maximize your return on investments!
To your investing success!