Beta

Beta measures how much a stock tends to move when the overall market moves. A beta of 1.0 moves with the market, above 1.0 swings more, and below 1.0 swings less. In CAPM, beta scales the equity risk premium to fit one stock.

A beta of 1.2 means the stock has tended to rise or fall about 1.2% for each 1% market move. Times a 5% equity risk premium, that adds 6% to the 5% risk-free rate for an 11% cost of equity. Beta is usually estimated by regressing a stock's returns against a market index over several years of weekly or monthly data.

Published betas reflect each company's current debt load, which makes them levered betas. To compare companies or value a private firm, analysts strip out the debt to get an unlevered beta. If you have no beta at all, see how to calculate cost of equity without beta, and if your beta is negative, see whether cost of equity can be negative.