How would you calculate a company's beta?

To calculate a company's beta, the correct method involves determining the relationship between the returns of the company and the returns of the market. Specifically, beta measures the volatility of a company's stock in comparison to the market as a whole.

The formula for beta is expressed as the covariance of the returns on the company divided by the variance of the returns on the market. Covariance measures how changes in the company's returns relate to changes in the market's returns, indicating the direction and degree to which the stock moves in relation to market movements. The variance of the market's returns serves as a normalization factor to adjust for the overall volatility of the market itself.

This relationship quantitatively defines the degree to which the company's returns are expected to change in response to changes in market returns. A beta greater than one implies that the company's stock is more volatile than the market, while a beta less than one indicates it is less volatile.

In contrast, the other options do not accurately represent the calculation of beta or involve the incorrect elements in their formulas. Thus, the calculation of beta as expressed in the correct choice provides an essential tool for investors assessing the risk of a stock relative to the market.