Beta Finance | Beta Formula and Calculation | Definition | What is Beta in Finance?

Beta Finance

Beta Finance Calculation and Formula | Definition

Beta is a measure of the systematic, non-diversifiable risk of an investment. The beta coefficient of a security, fund, or portfolio represents its market sensitivity, relative to a given market index and time period. The S&P 500 is commonly used as a market index for such calculations.

Beta is a statistical estimate of the expected average change in an investment's rate of return that corresponds to a one percent change in the market over the time period selected.

A beta value of 0.0 indicates that the investment is risk-free or independent of the market. T-bills are often used as examples of risk-free investments. A value of 0.5 indicates that the security, fund, or portfolio is expected to be only half as risky or sensitive as the average for the market. A value of 1.0 indicates that the investment has the same risk or response as the market, as defined by a market index, such as the S&P 500 or the Russell 3000®. A value of 2.0 indicates that it is expected to be twice as risky or sensitive as the market.

In Russell Style Classification (RSC), beta is calculated as follows:

Where	Equals
	Beta
_ x	Benchmark return
_ y	Portfolio return

In Russell Performance Universes (RPU), beta is calculated as follows:

Where	Equals
	Beta
n	Number of observations
Rxi	Market excess return (market proxy return minus risk-free proxy return)
Ryi	Portfolio's excess return (portfolio return minus risk-free proxy return)

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