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Beta Estimates

The document outlines the steps to estimate stock beta using Excel, including installing the Data Analysis toolkit and running a regression analysis. It provides the formula for calculating beta and explains how to prepare data for regression, inputting stock and market returns. The example shows a regression output with a beta of 2.04, indicating that 51.4% of the stock's risk is attributed to market risk.

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5 views2 pages

Beta Estimates

The document outlines the steps to estimate stock beta using Excel, including installing the Data Analysis toolkit and running a regression analysis. It provides the formula for calculating beta and explains how to prepare data for regression, inputting stock and market returns. The example shows a regression output with a beta of 2.04, indicating that 51.4% of the stock's risk is attributed to market risk.

Uploaded by

gksduswls24
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ESTIMATING BETAS

You would need to run a regression in Excel, and that would require you to have “Data Analysis”
toolkit properly installed.
• Go to Excel  on the toolbar, click on “Data” tab, look for “Data analysis”
• If you don’t see it, it’s probably that your Excel doesn’t have it in place, so you need to install it
following these steps:
• Go to File  Options  Add-ins  Manage Excel add-ins  Go  Add-ins window will open
 Tick the box “Analysis ToolPak”  OK

1/ CALCULATING BETA USING THE FORMULA


β = covariance (Ri, RM)/ s2M
in which cov(Ri,RM) = E{ [Ri – E(Ri)] x [RM – E(RM)]}
Refer to the handouts “Estimating Beta using the Formula”

2/ RUNNING THE REGRESSION TO ESTIMATE BETA


In the “Estimating Beta using regression – example”, I have 60 months of data for Market and for
Stock(i). I will estimate Beta of Stock “i” using the regression model:
Ri = a + β RM
Where:
a = intercept from the regression
β = Slope of the regression = covariance (Ri, RM)/ s2M
The slope of the regression corresponds to the Beta of the stock and measures the riskiness of the
stock
Step 1. The first 4 columns are original data. They are market index and stock prices data collected by
the end of each month from Nov 08 to Oct 13(monthly intervals).
-Calculate monthly market return (%) =
(Market indexmonth (t) – Market indexmonth (t-1))/Market index month (t-1)
-Calculate monthly stock (i) return (%) =
(Stock pricemonth (t) – stock pricemonth (t-1))/ Stock pricemonth (t-1)
 Data set now is in terms of “ monthly return” and is ready for regression

Step 2. Running the regression


• Click on Data  Data analysis  Regression then a window will pull up
In the “Input Y range”: Input your Stock “i” monthly return dataset
In the “Input X range”: Input your Market monthly return dataset
Then choose a point for the Output range (here I choose cell H2, on the same sheet with my
data; If you don’t choose anything, Excel would return regression output in a “new worksheet
ply”)
Then click OK  the regression output would appear as follows at cell H2:

“a” in
regression

Slope of the regression, or Beta


• The output of my regression would be:
Ri = -0.013089 + 2.048 RM  Stock i’s beta is 2.04
• Adjusted R Square = 51.4%  this is a measure of the “goodness of fit” of the regression. The
economic rationale is that it provides an estimate of the proportion of the risk of a firm that
can be attributed to market risk; the balance (1- R2) can then be attributed to firm-specific risk.
 51.4% of Stock i ‘s risk can be attributed to market risk!!!

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