The formula to calculate the Beta Coefficient (β) is:
\[ β = \frac{Cov}{Var} \]
Where:
The beta coefficient is a measure of the sensitivity of an asset’s returns to the returns of the market. It is used in the Capital Asset Pricing Model (CAPM) to determine the expected return of an asset based on its beta and the expected market return. A beta of 1 indicates that the asset’s price will move with the market, a beta of less than 1 means that the asset will be less volatile than the market, and a beta of greater than 1 indicates that the asset will be more volatile than the market.
Let's assume the following values for an example:
Using the formula:
\[ β = \frac{0.05}{0.02} = 2.50 \]
The Beta Coefficient is 2.50.