Calculation of Stock Beta - Stock Price and Market Risk (Volatility)

Stock Beta is a calculation or measurement of volatility or risk of a stock trading on the stock market. It is the fluctuation in stock prices and the market in general. Some stocks have greater risk than others, and thus carry higher Stock Betas. Stock betas are measured using regression analysis.

A Beta of 1 shows the stock is moving in proportion with the market in general.
A Beta Greater than 1 shows the stock is more volatile than the market in general (examples include many high-tech stocks).
A Beta Less than 1 shows the stock is less volatile than the market in general (examples include many utility company stocks).

A Stock's Beta is the middle line between minimizing the risk of undertaking investment activities and maximizing the returns gained. For example, consider a high-tech stock with a Beta of 2. This means the stock is twice as volatile as the market. Therefore:

Stock Beta = 2
Market % Return	Individual Stock % Return
10%	(10% x 2) = 20%
-8%	(-8% x 2) = -16%

If the market provides a 10% return to ordinary investors, the stock with a Beta of 2 will provide a 20% return (higher risk, higher return!). However, if the market provides a negative 8% return, then the Stock with a Beta of 2 will provide a -16% (higher risk, probability of lower returns!).

Here's another example, with a stock that has a Beta of 0.5

Stock Beta = 0.5
Market % Return	Individual Stock % Return
10%	(10% x 0.5) = 5%
-8%	(-8% x 0.5) = -4%

If the market provides a 10% return to ordinary investors, the stock with a Beta of 0.5 will provide a 5% return (lower risk, lower return!). However, if the market provides a negative 8% return, then the Stock with a Beta of 2 will provide only a -4% loss, (lower risk, lower returns!).

Analysis of Common Stock Betas

Negative Beta	Shows an inverse relation to the stock market and is highly unlikely. Gold Stocks though fall into this category.
Beta of 0	Value of current cash (with no inflation) has a Beta of 0. No matter how the market performs, idle cash sitting always remains the same (with no inflation).
Beta 0 - 1	These stocks are less volatile than the stock market in general. Commonly includes utility company stocks.
Beta of 1	A Beta of 1 means the stock market is moving in the same direction as the Market Index such as S&P 500.
Beta >1	Stocks with a Beta of >1 are more volatile than the stock market. This commonly includes high-tech stocks. Why? This is because as technology becomes rapidly advanced, outdated technology is useless. Many companies are thus wiped out due to out-dated technology.
Beta >100	This is impossible. A stock can never be 100 times more riskier than the stock market in general. This is because a small change in the returns of the stock will make the stock price go to $0.