Beta is a measure used in fundamental analysis to determine the volatility of an asset or

portfolio in relation to the overall market. The overall market has a beta of 1.0, and individual
stocks are ranked according to how much they deviate from the market.

What is Beta
A stock that swings more than the market over time has a beta greater than 1.0. If a stock
moves less than the market, the stock's beta is less than 1.0. High-beta stocks tend to be
riskier but provide the potential for higher returns; low-beta stocks pose less risk but typically
yield lower returns.

What Is Beta?
A beta coefficient is a measure of the volatility, or systematic risk, of an individual stock in
comparison to the unsystematic risk of the entire market. In statistical terms, beta represents
the slope of the line through a regression of data points from an individual stock's returns
against those of the market.

As a result, beta is often used as a risk-reward measure meaning it helps investors determine
how much risk their willing to take to achieve the return for taking on that risk. A stock's
price variability is important to consider when assessing risk. If you think of risk as the
possibility of a stock losing its value, beta has appeal as a proxy for risk.

How to Calculate Beta

To calculate the beta of a security, the covariance between the return of the security and the
return of the market must be known, as well as the variance of the market returns.

where:Covariance=Measure of a stock’s return relativeto that of the market

Variance=Measure of how the market moves relativeto its mean

Covariance measures how two stocks move together. A positive covariance means the
stocks tend to move together when their prices go up or down. A negative covariance means
the stocks move opposite of each other.

Variance, on the other hand, refers to how far a stock moves relative to its mean. For
example, variance is used in measuring the volatility of an individual stock's price over time.
Covariance is used to measure the correlation in price moves of two different stocks. 

The formula for calculating beta is the covariance of the return of an asset with the return of
the benchmark divided by the variance of the return of the benchmark over a certain period.

Beta Examples
Beta could be calculated by first dividing the security's standard deviation of returns by the
benchmark's standard deviation of returns. The resulting value is multiplied by
the correlation of the security's returns and the benchmark's returns.

Calculating the Beta for Apple Inc. (AAPL): An investor is looking to calculate the beta of
Apple Inc. (AAPL) as compared to the SPDR S&P 500 ETF Trust (SPY). Based on data over
the past five years, the correlation between AAPL, and SPY is 0.83. AAPL has a standard
deviation of returns of 23.42% and SPY has a standard deviation of returns of 32.21%.

In this case, Apple is considered less volatile than the market exchange-traded fund (ETF) as
its beta of 0.6035 indicates that the stock theoretically experiences 40% less volatility than
the SPDR S&P 500 Exchange Traded Fund Trust.

Calculating the Beta for Tesla Inc. (TSLA): Let's assume the investor also wants to
calculate the beta of Tesla Motors Inc. (TSLA) in comparison to the SPDR S&P 500 ETF
Trust (SPY). Based on data over the past five years, TSLA and SPY have a covariance of
0.032, and the variance of SPY is 0.015.

Therefore, TSLA is theoretically 113% more volatile than the SPDR S&P 500 ETF Trust.