In financial/investment terminology, beta is a measurement of volatility or risk. Expressed as a numeral, it shows how the variance of an asset—anything from an individual security to an entire portfolio—relates to the covariance of that asset and the stock market (or whatever benchmark is being used) as a whole. Or as a formula:

\begin{aligned}&\beta_p=\frac{Cov(r_p,r_b)}{Var(r_b)}\end{aligned}

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## What Is Beta?

Let’s break down this definition further. When you have exposure to any market, whether it’s 1% of your funds or 100%, you are exposed to systematic risk. Systematic risk is undiversifiable, measurable, inherent, and unavoidable. The concept of risk is expressed as a standard deviation of return. When it comes to past returns—be they up, down, whatever—we want to determine the amount of variance in them. By finding this historical variance, we can estimate future variance. In other words, we are taking the known returns of an asset over some period and using these returns to find the variance over that period. This is the denominator in the calculation of beta.

Next, we need to compare this variance to something. The something is usually “the market.” Although “the market” really means “the entire market” (as in all risk assets in the universe), when most people refer to “the market,” they are typically referring to the U.S. stock market—and, more specifically, the S&P 500. In any event, by comparing our asset’s variance to that of “the market,” we can see its inherent amount of risk relative to the overall market’s inherent risk. This measurement is called covariance. This is the numerator in the calculation of beta.

Interpreting betas is a core component in many financial projections and investment strategies.

## Calculating Beta in Excel

It may seem redundant to calculate beta, since it’s a widely used and publicly available metric. But there’s one reason to do it manually: the fact that different sources use different time periods in calculating returns. While beta always involves the measurement of variance and covariance over a period, there is no universal, agreed-upon length of that period. Therefore, one financial vendor may use five years of monthly data (60 periods over five years), while another may use one year of weekly data (52 periods over one year) in coming up with a beta number. The resultant differences in beta may not be huge, but consistency can be crucial in making comparisons.

To calculate beta in Excel:

1. Download historical security prices for the asset whose beta you want to measure.