How to calculate beta
β = Cov(R_asset, R_market) ÷ Var(R_market)
Worked example
- Over 12 months, the covariance of a stock with the index is 4.8 and the index variance is 4.0.
- β = 4.8 ÷ 4.0 = 1.2.
- If the market rises 10%, the stock is expected to rise about 12% — before any alpha.
How to interpret beta
- β = 1: moves in line with the market.
- β > 1: amplifies market moves (growth stocks, leveraged products).
- 0 < β < 1: dampened market exposure (utilities, low-volatility stocks).
- β < 0: tends to move against the market.
Check R² too: a beta estimated from a series with low correlation to the market explains very little of the asset's behaviour.
Limitations and common mistakes
- Use returns over the same dates for both series — misaligned data produces meaningless betas.
- Beta depends on the window and frequency; daily and monthly betas for the same stock can differ.