Beta and choosing the market

In the past I have posted several times about the BETA and using the formula that is available to download a historical (rolling) BETA using Datastream. Using the formula in combination with a Request Table you can download varying BETA’s for many equities for many specific time periods.

To quickly recap, the BETA is “a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1. A beta below 1 can indicate either an investment with lower volatility than the market, or a volatile investment whose price movements are not highly correlated with the market. . . . A beta above one generally means both that the asset is volatile and tends to move up and down with the market.” (See wikipedia).

Now what can you choose as the benchmark/market if you have a mixed selection of equities from different exchanges? The benchmark is often chosen to be similar to the  chosen equities. For example, for an S&P 500 index fund and gold, the index would be the S&P 500 and the price of gold. In practice a standard index is used. If your selection of equities is large and very mixed it may not be easy to determine the standard index.

Using Datastream, however, it is possible to use the option of a static search to find out what Datastream considers to be the benchmark for each equity. It is the same static search that let’s you find out what the benchmark is when using the Datastream formula for the abnormal return using the code LI#MNEM or LI#NAME. Example:

Using the codes that you then get, you can easily use Excel to generate the BETA formula that can then be used in a Request Table search for different time periods. Example:

The BETA formula that I use here compares the result of 1 month to that for a period of 5 years (60 months), but the formula can be changed to days or other (sensible) options. You can download an example Excel sheet here.


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