How To Calculate Beta – Page 5/5

26 July, 2020 3 min read
how to calculate the beta of a stock

Interpreting Results

Now that we have this gorgeous looking graph, what exactly is it telling us?

Beta Frequency Distribution

Our histogram is showing us that – over the past 5 years – the beta of ABC has fluctuated quite a bit; however, the most frequent beta experienced by the stock lies around 0.62, so we can expect the stock to converge towards this value.

In fact, if we take a line graph of betas from Jan 2015 to Jan 2020, we can see how the beta is looking through time.

A line graph shows just how much beta can change over the years

Notice that near the end of 2019, the beta was quite low and trending upwards. It might be reasonable to say that the beta is converging towards its average…

… and in this case, it already has.

As of this writing, the beta of ABC is 0.62

When you conduct your own regression, the current beta and your calculated beta may not be the same; that’s okay. Depending on the shape of your histogram, you may be able to make an inference as to whether or not it will converge towards its average.

Remember that a point-beta is useless; since the returns of a stock and an index are changing day-by-day (week-by-week, month-by-month), there is no sense in using a single beta.

Since I am responsible for my own investing and financial well-being, this is how I would interpret the data:

“Between 2015 and 2020, Stock ABC has experienced large fluctuations in its sensitivity to changes in the market – also known as “beta”. Its most frequent beta experienced during this time was 0.62, and looking at a line graph I see an upward trend from an all-time low during the end of 2019. I expect the beta of this stock to converge closer towards its 0.62 average in the coming months.”

And in this case, my statement would have been correct.

Final Thoughts

This was one of the first things I ever learned during my Econ degree program; and it completely changed the way I look at investing.

I now understand that investing is making a decision under risk and uncertainty.

  • It’s using math to hedge bets
  • It’s using statistics to analyze data
  • It’s using logic to interpret data
  • It isn’t just about making money, it’s about not losing money

If these results feel open to interpretation, it’s because they are. Interpreting the results of a beta frequency distribution is where science and art blend. The reason why is because not all investment decisions are rational and based on math and science; amateur investors make decisions based on emotion, but the pros use math to come out as winners every time.

If you are interested in learning what I have learned, check out some of my Recommended Reads (which is updated every month) to learn from the most well-known and successful investors.

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