Okay, welcome back.

Welcome to video number 24, where Chris is going to show you on

the computer, how you can actually calculate your own beta, as long as you couldn't
get the data.

Now, there's a couple of things here. The only reason why you would actually go and
calculate your own beta is really because you can't get the beta number anywhere
else. There's a lot of online resources, where you can actually get the data. So go
onto all of the typical financial websites. And you'll see that you'll get beta
values for most stocks on most websites. what you'll typically see is the three
year beta. The problem with going on these websites sometimes is that you don't
actually know the length of time that you're looking at in terms of beta.

In the download section, the one that you're looking at, in all of the spreadsheets
the beta that you're looking at, there is the five year rolling beta, which is from
a company in the United States called Value Line. Now, if you have a beta of that
length of time, five years, it's very, very unlikely that over short spaces of
time, that beta is going to change, a great deal. So really, if you're going to
update these spreadsheets, and use these online resources, you don't really have to
change your beta too often, if you're going to use the online resources and
download them. And if you're using five year or three year beta; but if you're
using very short term beta, obviously, you're going to have to update this a lot
more often. So if you are using three months, six months or one year beta, then you
are going to have to update them, but I wouldn't worry about it too much if you're
using three and five year, you can update these every six to 12 months.

the other thing with beta, when you're calculating your own beta is that it's
actually a step further from really what a retail trader should massively be
worried about. Because what you really should be worrying about is the positions
that you've gone on, having the correct positions. That's first and foremost. this
really comes secondary.

And one of the reasons why we're showing you this is because a lot of people will
have the objective of working in the industry one day. So either working for a
hedge fund or working at an investment bank. This is another thing that you'd be
expected to know, understand and be able to calculate if you were going into the
industry. From a retail trader perspective, if you can actually just get the beta.
And because beta isn't a perfect measure anyway, if you can get the beta and you're
trying to hedge out market risk as accurately as possible. But we all know that it
can't be 100% accurate, because relying on beta or relying on it to be 100%
accurate, doesn't really work.

beta is just a measure that we use, in an attempt to try and hedge out market risk
as best as we possibly can. And beta can change. But if you use it over a long
enough time periods, it should be fairly accurate.

So don't worry about it too much. If you're watching Chris on the computer, and you
think it's a bit too advanced for you, if you can get the beta numbers, that's
fine. If your objective is to work in the industry one day, then this is something
you'll have to learn.

So let's go over to the computer screen, Chris is going to show you how to do it.
You've got the downloads with five year rolling beta in the download section. And
you can actually go and get this number on decent websites anywhere online. So
let's get right into the presentation Chris show you how to do it. And I'll see you
at the end of the video with a summary of everything that we've learned so far.

Okay, so now Chris is going to show you how you can calculate your own beta. In
case you can't actually get beta publicly from the websites that we usually look
at. Or you think the beta data is unreliable. So we're going to use a very well
known stock in the United States. And Chris is going to show you how to do that
now. So let's calculate the beta, take it away Chris.

In this video I'm going to talk you through how you can calculate your own beta
value using Excel. So beta value is just a statistical measure of the sensitivity
of a stock to the market. And by market what we typically mean, it's industry
practice to use the index, in which the stock that we're looking at as listed in.

So, in this example, we're going to use Heinz as our stock consumer staple stock
that we'd expect to have low sensitivity to the market. And we will see how its
returns correlate with the s&p500, which is the index in which it's listed in and
from that we can obtain its sensitivity, which is its beta value.

So let's go ahead and get started. The first thing we need to do is gather our
data. So if we go to Yahoo Finance and in the ticker box, the Enter Symbol box in
the top left, we type HNZ for Heinz. And select Heinz company. And then on the left
hand side, navigate to historical prices.

Now we're going to calculate a three year beta, which is quite typical on websites
such as Bloomberg, and other financial websites, they typically give you around a
three to five year rolling beta. So we'll obtain our data from the third of March
2010 to third of March 2013. And we'll get it on a weekly basis. Update the table
by clicking Get prices, scroll to the bottom of the webpage, and click download the
spreadsheet. And at this point, you can save this file on your hard drive or you
can go ahead and open the Excel spreadsheet straight away as we're going to do and
then save it once you're in it. Okay, so just go to file, save as, save it on
desktop, save as HNZ beta. Save it as an Excel workbook. That's fine.

So the first thing we'll do in this spreadsheet is just adjust the dates column so
we can see the dates. Okay, so to calculate beta, we also need the price data from
the s&p500. So we can create returns columns for both Heinz and the s&p500 and see
how they're correlated.

So if we go back to Yahoo Finance, and type in s&p, and select the s&p500 from the
drop down list, and again, go to historical prices. And we need to make sure that
we select the data between the same range and with the same frequency as we did
before. So that was March 3 2010 to march 3 2013, on a weekly basis, make sure you
update the table by clicking Get prices, scroll to the bottom of the webpage and
click download the spreadsheet again. And we'll just go ahead and open the
spreadsheet. You don't need to save this file.

Okay, so now we've got our original sheet, which is the Heinz price values. And
this is our s&p500 prices. So if we go to the back to the Heinz sheet, and what
we're going to do is get rid of all these columns of data that we don't need to
calculate returns and our beta value. So what we'll do is just leave the closed
column and the date column. So we select Column B, and hold Ctrl, and select C, D,
F and G, so that will select the open, high, low, volume and adjusted close and
then right click within the selection and press Delete. And that will leave us just
with the date in column A and closing prices of Heinz in Column B.

And the next thing we want to do is import the s&p500 closing prices into this
spreadsheet into column C. So what we do is we go back to the s&p500 spreadsheet
and we select Column E and we just press Ctrl C once that's selected to copy and
then back in the Heinz spreadsheet, go to cell C1 Press Ctrl V to paste.
Okay. So to make this a little bit clearer, what we'll do is rename column B and C,
instead of just close, we'll rename them to their appropriate asset names. So in
the one, so be one, we'll rename that as HNZ price. And in actually, to make this
consistent; price, brackets, HNZ. And in C1 price, brackets, s&p and adjust the
columns is necessary, the width so we can fill that in.

Okay, so in column D, what we'll do is create the returns for Heinz over this
period. So let's head up that column in D1 or column E. In E1, returns, brackets
HNZ, adjusts the column. And in F will do something similar, but with the s&p, so
we type in returns s&p into that cell.

Now, we need to use the returns formula in cell E two and F two. So in E two, it's
the closing price of the current day minus the closing price of the previous day,
divided by the closing price of the previous day. And that gives us our return. And
we can copy that formula down easily by navigating to the bottom of the
spreadsheet. If we click on this data in column A, B and C, we can press Ctrl and
down to the bottom of that data quickly. Go across the column E and press CTRL
SHIFT and up to select all the cells that we want to copy down the formula in cell
E2 down to so we've got all those cells selected, we just press Ctrl D and that
copies all of the returns down. And we'll do the same thing for the s&p. So equals
closing price today minus the closing price yesterday, divided by the closing price
yesterday gives us the returns today. And the same thing, navigate to the bottom of
the spreadsheet ctrl shift up select all cells and Ctrl D to copy all of that down.

Just go down to the bottom of the spreadsheet, what we'll see is there's two cells
there at the bottom that have got errors This is because our returns formula
requires price data from a previous day. And obviously in the bottom row, there is
no previous day. So that's, that's giving us an error. So what we do is we just
delete those two cells by selecting them and pressing Delete on the keyboard.

Okay, so now we've got our returns, we'll just actually make this look a bit better
by selecting all our returns in the Heinz and s&p column. So I used Ctrl Shift,
starting from cell E2 I use Ctrl, Shift, right arrow and down arrow to select all I
quickly. With all that selected, right click inside the selection, go to format
cells. And we're going to change the number category to percentage, two decimal
places is fine. Okay.

So in the next step, we're going to calculate beta. To do this, we need to use the
data analysis tool, which is located in the Data tab on the right hand side over
here, if you don't already have that they're installed on your Excel, you'll have
to install it manually using a plugin called analysis tool pack. And there's a
guide on how you do that in the accompanying PDF. So let's just go ahead and click
data analysis. And we'll go to regression, press OK.

So regression is just a statistical procedure that we used to measure how well

certain variables in a model can explain another variable that we're testing. So
that also allows us to gain sensitivity measures of each of these variables. And
that's essentially what beta is. So to make a bit more sense in what we're actually
doing here, we're testing Heinz. Heinz is our variable when we're testing it with a
model of the s&p. So we're testing how well the returns in the s&p explained the
returns in Heinz. And by comparing those by modeling that it'll give us a
coefficient of the s&p500 that shows us the sensitivity of Heinz to the s&p500.

Okay, so let's just continue, if you want to know a bit more about regression, that
is explained a little bit more in the accompanying PDF, and also, there's plenty of
resources online that you can look at as well. But let's just go ahead and start.
So our y input range is our Heinz return. So in the Y input range box, we'll click
cell E two and press Ctrl, Shift and down. And that will select all the Heinz
returns. And then we click into the x input range box and do the same for the s&p.
So we click to cell f2, Ctrl, Shift down to select all of those cells.

And we want to display our regression in this spreadsheet, so we change the output
range from a new worksheet to output range. And be careful because this throws our
selection back up to the Y input range, which you've already selected. And we don't
want to edit that. So make sure you click off into the output range box. And we're
going to display this in cell I Two. And just before we press OK, and display our
regression, we need to make sure that we click the line fit plots box down here,
which will show us a graphical interpretation of our regression. So just select
that, and press OK.

OK, so just before edit this data a bit, let's just or just before we look at this
data, and I explained it a bit more, let's just edit these columns so that they
show all this data properly. So with that still selected, we'll just go to Home on
the Ribbon, and then format, and then Autofit column width. And that allows us to
see all this data a little bit more easily.

And now we'll edit the graph before I finish up by summarizing what we're actually
looking at here. So just make the graph bigger by clicking dragging the bottom
right of the graph. Okay, so there's a few things we need to do here, the first
thing we'll, we'll edit the name of the graph, so instead of x variable, one line
fit plot; we'll call this Heinz beta. We don't need these labels here on the right
hand side, so we just select them, press Delete.

And we want to be able to see our graph a little beter so all these dots here, what
you can do is edit the size of these dots, so they aren't quite as intrusive, and
they don't cluster quite so much, or they don't appear to cluster as much. So if we
just select one of the blue dots, and actually click off again, and if we just
double click one of the blue dots and go to market options and change the market
type the built in the type is fine, and we'll just reduce the size and we can see
them all a little bit better do reduce it to four and do the same for the red dots.
So click off and then double click one of the red dots. Marker options built in
reduce this to size four. Okay, so we can see a little bit more about what we're
dealing with.

Right so last thing to do, will rename the axis labels. So first, the x axis is the
s&p500 and the y axis is Heinz. Okay, and we'll move these by clicking and dragging
those labels so it makes a bit more sense. Okay, so this axis horizontal axis
represents the s&p500 returns in relation to the Y axis which is the Heinz returns
and all these dots show for a given week what the returns in Heinz were compared to
the s&p500.

And what we can see is that the s&p500 generally increases at a higher rate, a lot
higher rate, then the Heinz returns. So let me just demonstrate that if you were to
just eyeball this and look across from 5% return on Heinz, and go across, okay, 5%
on s&P would be roughly here. And none of our actual values are there. Okay, so
that what that saying is that the s&p returns for Heinz to have a return of 5%, the
s&p returns would generally be a lot higher, or tipping that on its head. What we
can say is, compared to the s&p500, Heinz returns a lot less given a movement in
the s&p500. So the sensitivity of Heinz to the market to the s&p500 is low. And
that's what we'd expect, because this is a consumer staple stock. And meaning that
it's less affected by the business cycle, and there's always some demand. And so it
has fairly consistent returns, it's a defensive stock.

(defensive stock = there's always some demand = less affected by the business
cycle)
Okay, so that's the graph explained a bit. so I explained what the blue dots are,
they're all the individual returns of Heinz versus the s&p500. The red dots are
basically represent a line of best fit between all the blue dots. Okay, so that's
like our model line. And the slope of that line represents the sensitivity of Heinz
to the s&p500. And so the slope of that line is also our beta value. And we're
given slope of that line in this data, summary output, X variable, one coefficient,
so that's cell j19. That's our beta value. So our beta value is 0.38 roughly of
Heinz, which makes sense, again, it's a defensive stock.

So I'm going to hand back to Anton now, who's going to talk a bit more about what
we've discussed here, and give a short summary and how you can use beta, why it's
useful and why we've done what we've done here today.

Okay, welcome back. So what you just saw there from Chris was really a step by step
guide to calculating your own beta, you can actually go into the download section,
we've got a PDF, which takes you through the entire step by step process to
calculate your own beta.

As I said earlier, you don't really need to go and do this for everything you do.
If you do actually manage to get, you know, accurate beta online, and you've got a
good resource for getting a decent a beta that has a decent time left, you
shouldn't worry about this too much, you definitely do not have to do this step by
step for every single position you've got in your portfolio. That's just crazy.

From a retail trader perspective, the most important thing is that you've got the
right positions, and then you attempt as best as possible to hedge out market risk.
If you want to go and do that. Remember, you can actually be cash for cash, as in
long $10,000, short $10,000. But if the betas are wildly different, and the beta
ratio is high, that cash for cash is not going to work very well as a trade. So you
may want to try and hedge out as much market risk as possible.

So the step by step guide is there. You can always refer back to the video if you
have some difficulties. And watch Chris go through that process again. But you
know, definitely don't do this for every single trade that you do. That would just
be doing too much work for no real value add to your portfolio. If you can't get
the beta somewhere else.

The other thing that we've mentioned, in terms of this process, if you are of the
objective, that you're going to work in the industry oneday, you want to work at an
investment bank, you want to work at a hedge fund, then this is actually quite
important. You do actually have to understand this. If you were working at an
investment bank, you'd be under a hedge fund for that matter. You would be looking
at your own portfolio. And you would be looking at what we call a value at risk. So
the amount of money that your portfolio can make or lose per day, on a one standard
deviation, two standard deviation and three standard deviation day. And there's a
lot of assumptions made by the back office and middle office in terms of the betas
that they input into your portfolio. So you'd actually have to understand this
process. So you know, when you're looking at your portfolio, what the real
situation is, in terms of the value of money at risk that you can make or lose per
day.

So, if your objective is this, you should to work in the industry, you should
absolutely learn this inside that. From a retail trader perspective, don't worry
about it too much. You can go cash for cash. If the beta ratio is high, you will
attempt to hedge out market risk as best as you possibly can. If you can get the
beta publicly from a decent website, then that's fine. If you can't find beta
anywhere, then try and go through this exercise.

Okay, so now we're pretty much done with risk management processes. But the last
thing we have to do as a trader, in terms of having discipline is having self
awareness. self awareness of our own abilities as traders. So that's what we're
going to do next, we're going to go over to video number 25 and start looking at
some standard industry metrics that measure your performance as a trader so you
understand where your weaknesses are and where your strengths are and what you need
to work on over the medium or long term as a trader in terms of your weaknesses.

So let's go over to video 25 where we'll be looking at the Kelly criteria.

Transcribed by https://otter.ai