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.
Download Practice Workbook
You can download the practice workbook from here.
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:
Formula for Calculating Alpha:
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.
1st 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)
Read More: How to Calculate Alpha of a Stock in Excel (with Easy Steps)
2nd Step: Define a Risk-Free Rate
- Afterward, insert a Risk-Free Rate manually. We have 1.5% as the risk-free rate.
Read More: How to Get Stock Prices in Excel (3 Easy Methods)
Similar Readings
- How to Import Stock Prices into Excel from Google Finance (3 Methods)
- Add Stock Data Type in Excel (2 Effective Methods)
- How to Track Stock Prices in Excel (2 Simple Methods)
- Get Stock Quote with Excel Add-in (With Easy Steps)
- How to Import Stock Prices into Excel from Yahoo Finance
3rd 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.
Read More: How Do You Automatically Update Stock Prices in Excel (3 Easy Methods)
4th 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.
Read More: Stock Return Frequency Distributions and Histograms in Excel
5th 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.
Read More: How to Get Current Stock Price of India in Excel
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:
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.
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.
Related Articles
- Download Historical Stock Data into Excel (with Easy Steps)
- How to Calculate Correlation between Two Stocks in Excel (3 Methods)
- Stock return analysis using histograms & 4 skewness of histograms
- Get Historical Data of NSE Stocks in Excel (2 Effective Ways)
- How to Create Stock Comparison Chart in Excel (3 Easy Methods)
