Beta

Beta is the measure of how a financial asset’s value moves in tandem with the US stock market.

In order to calculate an asset’s Beta, the historical day to day price movement will be measured going back several years.  This price movement is recorded in the price of the asset as compared to the price of the asset 1 trading day before as measured in percentage terms with positive or negative price movements.  This daily price movement is then compared to the daily percentage movement of the US stock market.

The daily percentage movement of the US stock market is represented by the percentage movement of the S&P500 Index.  After the two data points are measured for each day the correlation of the asset’s amount and direction of movement as compared to the US stock market is recorded.  An asset with perfect correlation to the S&P500 would have a Beta of 1.0.

An asset that historically moved twice the direction of the US stock market would have a Beta of 2.0, where as an asset that moved ½ as much would have a Beta of 0.5.  If the asset moved inversely to the S&P500, the asset’s beta would be represented by a negative number in relation to the degree of correlation in percentage terms.