How to Calculate Alpha and Beta in Excel (with Easy Steps)

When it comes to analyzing investments, the concepts of alpha and beta are essential to understand. Alpha measures the excess return of an investment compared to its standard, while Beta measures the volatility of an investment in relation to its standard. Excel is a powerful tool for calculating these parameters. In this article, we’ll walk you through how to calculate Alpha and Beta in Excel.

What Are Alpha and Beta in Stock Market?

Alpha and Beta are two important measures used in finance to evaluate the performance of an investment compared to its standard.

Alpha is a measure of an investment’s performance that cannot be attributed to the performance of the market as a whole. A positive alpha indicates that the investment has performed better than its standard, while a negative alpha indicates that the investment has underperformed.

Beta measures how much an investment’s returns move in response to changes in the standard returns. A beta of 1 indicates that an investment’s returns move in line with the standard returns, while a beta greater than 1 indicates that the investment is more volatile than the standard, and a beta less than 1 indicates that the investment is less volatile than the standard.

Formula for Calculating Beta:

Beta= Covariance of the portfolio returns with the expected returns / Variance of the portfolio returns

Formula for Calculating Alpha:

Alpha= Average portfolio return of the investment – (Risk-free rate + Beta * (Average market returns of the benchmark – Risk-free rate))

How to Calculate Alpha and Beta in Excel (Step-by-Step)

Without any further delay, we will jump into the stepwise procedure to calculate the alpha and beta in Excel. We will use some built-in functions of Excel to determine the alpha and beta values.

1^st Step: Prepare Outline and Dataset

Firstly, we have to create a dataset that must contain a set of Portfolio Returns (standard returns) and Market Returns.

Then, use the AVERAGE function of Excel to determine the average of Portfolio Returns like in the following formula.

=AVERAGE(C5:C14)

Also, use the following formula for the average of Market Returns.

=AVERAGE(D5:D14)

2^nd Step: Define a Risk-Free Rate

Afterward, insert a Risk-Free Rate manually. We have 1.5% as the risk-free rate.

3^rd Step: Calculate Beta Using COVARIANCE.P and VAR.P Functions

Now, it’s time to calculate our desired parameter Beta. We’ll follow the formula given above in the article to calculate beta. Just apply the following formula in the G6 cell.

=COVARIANCE.P(C5:C14,D5:D14)/VAR.P(C5:C14)

In the formula, the COVARIANCE.P function determines the covariance among two sets of data from the ranges C5:C14 and D5:D14. And the VAR.P function determines the variance of data from range C5:C14. We divided the covariance result with the variance result to get beta.

4^th Step: Determine Expected Return

Before calculating Alpha, we need to determine another term, the Expected Return.

Just apply the following formula in the G8 cell.

=G4+G6*(D15-G4)

In the formula, we have used the following formula for the calculation.

Expected Return = (Risk-free rate + Beta * (Average market returns of the benchmark – Risk-free rate))

5^th Step: Calculate Jensen’s Alpha

Lastly, we will calculate the Alpha now. Use the following formula in the G10 cell to get alpha.

=C15-G8

In the formula, we subtracted the expected return from the average of portfolio returns.

Frequently Asked Questions

1. How to interpret alpha and beta values?

Ans: A positive alpha indicates that the investment has performed better than its standard, while a negative alpha indicates that the investment has underperformed. A beta of 1 indicates that an investment’s returns move in line with the standard returns, while a beta greater than 1 indicates that the investment is more volatile than the standard, and a beta less than 1 indicates that the investment is less volatile than the standard.

2. How to calculate daily returns for portfolio and benchmark index?

Ans: To calculate daily returns, you can use the formula:

(Price today – Price yesterday) / Price yesterday.

Repeat this calculation for each day of historical data.

3. What are some limitations of using alpha and beta in investment analysis?

Ans: Alpha and beta are based on historical data and may not accurately predict future performance. Additionally, they do not take into account factors such as management quality, industry trends, and macroeconomic conditions. Finally, they may not be suitable for all types of investments, such as alternative investments or illiquid assets.

Things to Remember

Be careful while dealing with cell references in the formula. In some cases, we used absolute cell references with the “$” sign.
Change the Risk-Free Rate according to your needs.

Download Practice Workbook

You can download the practice workbook from here.

Calculate Alpha and Beta.xlsx

Conclusion

As we discussed, Alpha and Beta are very useful tools for financial analysis. Here, we discussed the stepwise procedures of how to calculate alpha and beta in Excel. Hopefully, it will come in handy for you. Don’t hesitate to leave a comment if you have queries or suggestions.

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How to Calculate Alpha and Beta in Excel (with Easy Steps)

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