Stock Beta

Category

Ratios

Units

Ratio (x)

Formula

Covariance of Stock Returns with Market Returns / Variance of Market Returns

Source

Calculated by GeminIQ from figures reported in SEC filings

Beta, or stock beta, measures how much a stock's price tends to move relative to the overall market. It is the slope of a regression of the stock's periodic returns against the returns of a market index, so a beta of 1.0 means the stock has historically moved in line with the market, above 1.0 means it has swung more, and below 1.0 means it has swung less.

Beta captures systematic risk, the part of a stock's volatility tied to broad market movements. It does not measure risk specific to the company, such as a failed product or a lawsuit, which tends to average out in a diversified portfolio.

Beta is market data, not an accounting figure. It is calculated entirely from historical prices and does not appear in SEC filings, which report a company's financial statements rather than how its shares trade. The standard calculation divides the covariance of the stock's returns with the index's returns by the variance of the index's returns over the same window.

The result depends on the choices behind it. Providers use different benchmark indexes, different lookback periods, and different return frequencies, such as several years of monthly returns or a shorter window of weekly returns. Some also adjust raw beta toward 1.0 on the view that extreme betas tend to drift back toward the market average over time. As a result, two reputable sources can publish noticeably different betas for the same stock. Beta is also backward-looking: a company that has changed its business mix or taken on much more debt may carry a historical beta that no longer describes it.

Beta is the risk input in the capital asset pricing model, where the expected return on equity equals the risk-free rate plus beta times the market risk premium. Analysts use the resulting cost of equity in discounted cash flow valuations. Because debt amplifies equity volatility, analysts often unlever a peer group's betas to strip out the effect of leverage, then relever them at the target company's own debt level.