Beta

Raw Beta (often just called Beta) measures a stock’s sensitivity to movements in the overall market. It indicates how much the stock’s returns move relative to the market’s returns.

Formula

$$\beta =\frac{\mathrm{Cov}(R_i,R_m)}{\mathrm{Var}(R_m)}$$

Where:

• $R_i$ = Return of the individual stock
• $R_m$ = Return of the market portfolio

Interpretation:

• $\beta =1$: Stock moves in line with the market.
• $\beta >1$: Stock is more volatile than the market.
• $\beta <1$: Stock is less volatile than the market.