Gold is a safe bet because during uncertain times it, acts as an hedge against inflation.

This Excel spreadsheet calculates the beta of a stock, a widely used risk management tool that describes the
risk of a single stock with respect to the risk of the overall market. Beta is defined by the following equation
where r
s
is the return on the stock and r
b
is the return on a benchmark index.
What Does Beta Mean for Investors?
A stock with a beta of
zero indicates no correlation with the chosen benchmark (e.g. cash or treasury bills)
one indicates a stock has the same volatility as the market
more than one indicates a stock thats more volatile than its benchmark
less than one is less volatile than its benchmark
1.3 is 30% more volatile than its benchmark
Tobacco and utility (e.g. gas & electricity) companies, traditionally regarded as stable and dividend-paying,
have low betas while technology companies have higher values. Stocks with a beta of above one should have
returns greater than the benchmark index, otherwise it is not regarded as a good investment.
If the benchmark returns 5%, then a stock with a beta of 1.5 should return 1.5 times 5% = 7.5% or more. If not,
other investments should be considered instead.
Investments with negative betas have counter cyclical volatility with respect to their benchmark. In an economy
thats decreasing, gold, bankruptcy advisory firms and companies involved in continuing education often have a
beta of less than zero.
There are, however, significant dissadvantages to beta.
1. Its calculated from historical data (and hence does not capture future changes in the market), and of
course depends on the chosen time period.
2. Beta does not discrimnate between upwards volatility and downwards volatility.
3. It assumes that volatility is described by a normal distribution this isnt always the case
In summary, beta should only be used in conjunction with other tools when you decide what to invest in.
You can get a list of stocks ordered by their beta at Yahoo Finance, but well now describe how you can
calculate it in Excel.
Historical Stock Returns
We first need a stock and a nominated benchmark index Ill pick BP and the FTSE. Then we need historical
stock prices for both. I used this spreadsheet for downloading historical stock data from Yahoo to get daily
closing prices for BP and the FTSE index between 3
rd
January 2011 and 1
st
July 2011.

Then we simply calculate the fractional daily returns, as described in the picture below.

Note that cell range E8:E108 contains the stock returns and the cell range F8:F108 contains the index returns
Beta Calculation
There are two ways of calculating beta with Excel the first uses the variance and covariance functions, while
the second uses the slope function.The corresponding formulae are given below.
1. =COVARIANCE.P(E8:E108,F8:F108)/VAR.P(F8:F108)
2. =SLOPE(E8:E108,F8:F108)

You could also calculate beta simply by plotting the benchmark returns against the stock returns, and adding a
linear trendline. Beta is then simply the slope of the trendline.
Here we see that BP has a beta of 0.29. This is low, and implies that BPs stock price does not vary
significantly when the FTSE swings up and down.

his article explores what the Treynor Ratio means for investors, and provides an Excel spreadsheet.
The Treynor Ratio is a performance metric that measures the effective return adjusted for market risk and is
defined by the following equation.

The investment beta measures the investment volatility relative to the market volatility. This is known as the
systematic risk, or the risk associated with the entire market.
Systematic risk cannot be reduced by diversification and arises from changes in the business cycle, the political
climate or economic policy.
The Treynor Ratio (also known as the reward-to-volatility
ratio) has a definition similar to that of theSharpe Ratio both are the effective return divided by the risk.
However, the Sharpe Ratio divides by the standard deviation (i.e. the total risk). But the Treynor Ratio divides
by the beta (the risk inherent in the market). Well-diversified portfolios should have similar Sharpe and Treynor
Ratios because the standard deviation reduces to the beta (i.e. the total risk and the systematic risk are the
same).
The Treynor Ratio is negative if
the risk free rate is greater than the expected return, and the beta is positive. This means that the fund
manager has performed badly, taking on risk but failing to get performance better than the risk free rate
or the risk-free rate is less than the expected return, but the beta is negative. This means that the fund
manger has performed well, managing to reduce risk but getting a return better than the risk free rate
The primary advantage to the Treynor Ratio is that it indicates the volatility a stock brings to an entire portfolio.
The Treynor Ratio should be used only as a ranking mechanism for investments within the same sector. When
presented with investments that have the same return, investments with higher Treynor Ratios are less risky
and better managed.