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Beta is a widely used quantity in investment analysis. We review the commoninterpretations that are applied to beta in finance and show that the standardmethod of estimation - least squares regression - is inconsistent with theseinterpretations. We present the case for an alternative beta estimator which ismore appropriate, as well as being easier to understand and to calculate.Unlike regression, the line fit we propose treats both variables in the sameway. Remarkably, it provides a slope that is precisely the ratio of thevolatility of the investment's rate of return to the volatility of the marketindex rate of return (or the equivalent excess rates of returns). Hence, thisline fitting method gives an alternative beta, which corresponds exactly to therelative volatility of an investment - which is one of the usualinterpretations attached to beta.

Investment Volatility: A Critique of Standard Beta Estimation and a Simple Way Forward