In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price.
However, history would suggest that simply isn’t the case. Indeed, this paper from Harvard Business School suggests that not only do low Beta stocks not underperform the broader market over time – including all market conditions – they actually outperform.
The numerator is the covariance of the asset in question with the market, while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute – especially in Excel.