How to Calculate Beta

What is Beta

Beta is a measure of a company’s stock volatility relative to the overall market. In other words, you’re really looking at a company’s stock returns (change in stock price) relative to the overall market returns (change in market stock price).

Beta is commonly used to estimate a company’s cost of equity via the Capital Asset Pricing Model (CAPM). Once an analyst uses Beta to calculate the cost of equity, they will usually take that figure to calculate a company’s Weighted Average Cost of Capital (WACC) which serves as a discount rate in a DCF analysis and other financial models.

Method 1: Online Pull

The first method of calculating Beta is to simply pull the estimated Beta figure from a financial database. Some commonly used free and paid resources include:

• Yahoo Finance (Free)
• Market Watch (Free)
• Bloomberg (Paid)
• Capital IQ (Paid)

This method isn’t the most technical and you won’t have much insight as to how the Beta was calculated. But, it serves as a quick and dirty way to pull an approximate beta figure for those of you looking for a quick number. 

Method 2: Comparable Companies

The second method to find the Beta of a stock is to use comparable public companies. This method involves gathering the Beta figures of similar companies (same industry, size, business model, etc.) and finding a median or average Beta that you can apply to your target company.

This method can be useful when you want to estimate the Beta for a private company that doesn’t have public stock price data or Beta figures. To use this method, check out this article on Unlevered Beta which guides readers on how to use the comparable companies method.

Method 3: Technical Calculation with Stock Data

The third method is the most technical, but perhaps the most “close to the source” when it comes to calculating Beta with actual stock price data. This method is better suited for older companies (ideally companies listed publicly for 5 or more years) as established companies will have more historical data to be used in the calculation.

Example: Calculating McDonald’s Beta

In this particular example, we are going to walk you through how you use free historical stock data from Yahoo Finance to calculate McDonald’s Beta in Excel.

Step 1

First, you’ll want to go to Yahoo Finance, search for your company (Ex. McDonald’s Corporation), and click on the historical data tab.

Step 2

Next, change the time period to five years back (5Y), click apply, then hit download. This will give you 5 years of historical stock price data in a CSV file that you can open in Excel.

Step 3

Open up the Excel file and keep the date column and the adjusted closing prices (feel free to delete the other columns). Then in a third column, calculate the daily stock returns by taking the percentage change of the day-to-day stock prices. Your spreadsheet should look like the image below.

Step 4

Repeat steps 1-3 with the SPY S&P500 ETF Trust to pull the historical stock price data that we’ll use to represent the overall market. Take the data from the download and place it just next to the McDonald’s data in step 3.

Step 5

Then you can use use the formula below to calculate Beta for McDonald’s. Fortunately, Excel has a built-in covariance and variance function that we can use to quickly apply this formula.

Formula:

Formula Inputs:

• B = Beta
• R_s = Company stock returns
• R_m = Market stock returns

Covariance:

Covariance/variance:

After completing the final step, you should have a calculated McDonald’s beta of 0.75592. (Your Beta will vary if you are using a different company or different time period).

Additional Resources

If you’re looking to further develop your technical finance knowledge to better compete for elite-level finance and investment jobs, check out our Complete Finance & Valuation Course using the get started button below!

Other Articles You May Find Helpful

• Unlevered Beta
• Cost of Equity Formula
• WACC Calculator
• How to Prepare an Income Statement