Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0.
A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market.
Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation of the security's returns and the benchmark's returns.
What does Beta measure. 1) Beta measures the stock's volatility relative to the market. 2) Beta measures the amount of systematic risk (i.e., market risk). 3) Beta is used in CAPM, which calculates the expected return of an asset (either stock or portfolio) based on its beta and expected market return.