How to Calculate Beta using Covariance and Variance
This video shows how to calculate the beta of a stock using the covariance of the stock with the market index.
Beta is equal to:
(1) the covariance of a company's stock returns with the returns of the market index (e.g., the returns of the S&P 500)
divided by
(2) the variance of the returns of the market index.
Covariance / variance = beta
For example, if we are examining monthly stock returns for a company called Fluffy Love and the S&P 500 for the past five years, and we find that the covariance between the returns of Fluffy Love and the returns of the S&P 500 is 0.8, while the variance of the returns of the S&P 500 is 0.4, this means that Fluffy Love has a beta of 2.—
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