Beta Calculation: Understanding a Stock's Sensitivity to Market Movements
What is the beta of a stock that has a standard deviation of 12.9% and a covariance with the market of 0.035, while the market itself has a standard deviation of 9.93%?
The beta of a stock measures its sensitivity to market movements. It is calculated by dividing the covariance between the stock and the market by the variance of the market. In this case, the stock has a standard deviation of 12.9% and a covariance with the market of 0.035. The market has a standard deviation of 9.93%. To calculate the beta, we need to divide the covariance by the variance of the market. The variance of the market is equal to the square of the standard deviation, which is (9.93%)^2 = 0.9864. Therefore, by dividing the covariance of the stock with the market (0.035) by the variance of the market (0.9864), we get the beta of the stock. Beta = Covariance / Variance Beta = 0.035 / 0.9864 Beta = 0.0356 The beta of this stock is 0.0356. A beta greater than 1 indicates that the stock is more volatile than the market, while a beta less than 1 suggests that the stock is less volatile than the market. In this case, a beta of 0.0356 means that the stock is less volatile than the market, indicating that the stock's price movements are relatively stable compared to the overall market. It is important to consider that beta is just one factor in analyzing a stock's risk and potential returns. Factors such as company fundamentals and market conditions should also be taken into account when evaluating a stock's performance and suitability for investment.