Beta means risk of stock of a company compared with risk of market so the more Beta is, the more risk the company has.

Investors can reduce risk of each stock by appropriate stock portfolio. However, they cannot reduce risk of stock market. Beta shows how this risk of stock market affects risk of each stock.

How to calculate Beta

If each stock price behaves exactly same as whole stock market price, Beta is 1. If each stock price behaves more than whole stock market price, Beta is more than 1, on the contrary, if each stock price behaves less than whole stock market price, Beta is less than 1.

Beta is calculated as below.

Beta =
Standard Deviation (SD) of return of a stock
/ SD of return of whole stock market
* Coefficient of correlation between return of a stock and return of whole
stock market

Beta =
Covariance between return of a stock and return of whole stock market
/ Variance of return of whole stock market

Covariance shows the level of relationship between two phenomena and Variance shows the level of fluctuation of a phenomenon. Variance is square of SD.

This calculation can be shown in graphs below. These are examples of Beta calculation by using two companies, Kao and Yahoo Japan.

Gradient of line drawn by variance shows Beta so Beta of Kao is about 0.8 and Beta of Yahoo Japan is about 1.4. This means TOPIX less affects stock price of Kao than TOPIX affects stock price of Yahoo Japan in this term.

Advertisement

<<

>>

Finance

Principle of Finance FCF (Free Cash Flow) DCF (Discount Cash Flow) WACC Beta Unlevered Beta IRR Terminal Value Disadvantages of WACC APV (Adjusted present value) Method
Making Portfolio and Diversification of Risk 1
Making Portfolio and Diversification of Risk 2
Return analysis by DCF 1
Return analysis by DCF 2
Important Indicator of DCF
Optimized Debt Equity Ratio
Tax Shield by Debt
Types of Debt
Policy of Dividend
Relationship between Policy of Dividend & Stock Price
Relationship between Own Shares Purchase & Stock Price
Investment to raise Stock Price
Bond
Coupon-Bearing Bond
Discount Bond
Bond with Warrant
Comparison of Yield Rate among Several Bonds
Securitization
Project Finance
M&A
Effect of M&A
Synergy Analysis
Financing in M&A
Process of Purchasing Stock Price in M&A
Types of Selling Business
Spinoff
Tracking Stock
Curve Out
LBO (Leveraged Buy Out)
MBO (Management Buy Out)
PPA (Purchase Price Allocation)
PMI (Post Merger Integration)