What Beta is Beta?

There is a lot of information out there regardless of your skill level in investing.  So what sources can you trust and why is this important?  A lot of people only look online at their favorite website to check P/E ratios and Betas without knowing how those calculations are created.  Further, many people are not aware that websites such as Yahoo finance, Google finance and the NYSE calculate their values differently. This may be surprising at first, but even if you already knew this, how do you decide which website is displaying the most accurate Beta for your stock?

We know that Beta is the best measure of systematic risk for the individual investor. But the answer can be found in how the statistics are captured, which is what we help explain.  You may not have thought about standard deviation since that brief moment in high school or college, and may have never heard of covariance, but these statistics, and how they are captured, are critical to the way beta’s are calculated.

To put Beta in definable terms, the various Betas you will observe online are due to what market portfolio (such as the S&P500) the stock is compared to, as well as how the returns are averaged over a period of time. Beta numbers will change drastically depending on if the returns are collected based on the past three years versus five, weekly returns versus monthly, if various adjustments for economic trends are used, if the company takes on more leverage, and how frequent the stock trades.  Beta in its simplest form can be described as the Relationship the returns of your stock has to the returns on the market, divided by how much the market fluctuates (Covariance of a single Stock’s returns to the Market returns /Variance of the Market).

This is why, if you do not know what market your stock is being compared to, and how often the returns are being calculated (as well as averaged), you will not know how accurate the Beta displayed is. This can lead to confusion, and is why pulling Beta from a single source to balance your portfolio risk can be misleading.

Therefore, if you know how the website is calculating its beta, you can better choose if the assumptions made are accurate for the time period you intend on holding the stock as well as its contribution to your portfolio risk. If you want further confidence, you can compare the average betas for your stock to the average of other companies that are comparable to your stock.