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Are there certain strategies and general rules on how to estimate the beta of certain companies? How do I instantly know that it's a beta < 1 or a beta >> 1 corporation? Any helpful ratios that might point in one or the other direction? I'm asking, because so far I've only calculated the beta using Excel and there was not much guessing left to do and I think I still don't have a good instinctive grasp of the matter.

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    $\begingroup$ You can not guess beta by just looking at the price data. As beta represents sensitivity of the stock prices to the market movement, there is no way for quick estimate atleast from the current prices. $\endgroup$ – Neeraj Oct 13 '15 at 8:13
  • $\begingroup$ Aren't there some balance sheet or income statement positions / ratios which can lead to a rough estimate? Maybe I should have left out the word instantly. "Within a reasonable amount of time" should be more accurate. $\endgroup$ – Lumberjack88 Oct 13 '15 at 9:58
  • $\begingroup$ No, there is no such way till yet. Exchange also report beta of a security. So you do not need to calculate beta yourself if it is time consuming for you. $\endgroup$ – Neeraj Oct 13 '15 at 10:02
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$\beta_s = \frac{cov(r_s,r_m)}{var(r_m)}$

High beta stocks (beta >> 1) are those that outperform market when it moves up and, correspondingly, lag market when it goes down. In general blue chips will have betas close to one, for a simple reason: it is this companies that have more weight in the index/market and, thus, they tend to be more correlated with the market. Small and middle cap companies will have higher betas.

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There are many approaches to calculate however mostly people prefer to calculate industry beta and then apply financial leverage on that to get company beta.

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  • $\begingroup$ I'd like to hear more about these approaches. How excactly would you apply financial leverage to this industry beta? And what about comparing the last two weekly returns of the stock vs the market? Wouldn't that be the fastest way to gain an intuition whether it's a high or a low beta stock? $\endgroup$ – Lumberjack88 Oct 14 '15 at 11:24
  • $\begingroup$ You can google for asset beta. In short you take monthly stock prices and index for 5 years and regress that to get beta for all similar firms. Similar here means similar in cash flow. And monthly because you should avoid noise in data. Once you regressed beta of all firm and deleverage them to get their asset beta and take an average of them.On that average beta apply leverage to get individual company beta. You can read Aswath Damodaran book to read more on this. $\endgroup$ – user86354 Oct 14 '15 at 17:38
  • $\begingroup$ Damodaran has a lot of stuff on his website too. $\endgroup$ – John Oct 16 '15 at 14:23
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Ans easy way is to look for direct competitors and compare the values.

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Following the CAPM, which is theteoretical base of beta, the beta of small and large stocks is calulated the same way. In accordance to the CAPM theory the beta of a stock should be constant over time and the risk free rate should be positive. In practice however, beta is not constant and the risk free rate may not be always postive in certain market condisitons. This is why in practice there exist some degrees of freedom to calculate the beta.

Further, as a result of distrust in the CAPM model, the empirical beta is often mixed with 1.

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