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 show 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, and lower returns!).

Analysis of Common Stock Betas

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becomes rapidly advanced, outdated technology is useless.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