How to Calculate the Beta of Your Portfolio?

What is beta?

Beta measures a given stock’s volatility in relation to the market overall. Technically speaking, a market, such as the S&P 500 index, will always have a beta of 1.0.

A stock’s deviation from the market decides its ranking. A stock that swings more than the market itself, carries a beta of more than 1.0, while a stock that swings less than the market, has a beta of less than 1.0.

Investing in high beta stocks might provide higher returns, but they also come with much higher risks. On the other hand, low beta stocks provide lower returns but are a lot safer.

What is portfolio beta?

A portfolio beta is nothing but the weighted sum of the individual asset betas.

If your portfolio consists of two stocks and half of your money is in Stock X with a beta of 2.00 and the remaining in Stock Y with a beta of 1.00, your portfolio beta is 1.50.

Portfolio beta describes the relative volatility of a securities investment portfolio.

How to calculate beta for a portfolio?

The beta is measured on a scale comparing the individual investment to a benchmark index like the S&P 500. A beta of “1.0” indicates that the investment’s volatility is the same as the benchmark’s.

This means that the investment’s value will fluctuate like the benchmark itself. In other words, a number higher than “1.0” indicates more volatility than the benchmark, while lower numbers indicate more stability.

How to calculate beta for your stock portfolio?

Portfolio Beta formula

To calculate the portfolio beta, you can use a portfolio beta calculator, or you can apply the portfolio beta formula while following these steps:

1. Add up the value (number of shares x share price) of each stock you own and your entire portfolio.
2. Based on these values, determine how much you have of each stock as a percentage of the overall portfolio.
3. Take the percentage figures and multiply them with each stock’s beta value. For example, if 25% of your portfolio comprises Apple and it has a beta of 1.43, its weighted beta would amount to 0.3575.
4. Add up the weighted beta figures that give you your portfolio beta.

How to calculate beta for individual stocks

In most cases, you will not be required to calculate the beta of individual stocks as those figures are readily available online.

However, the beta of individual stocks can be calculated across very complicated models, and here’s an easy-to-understand version for you.?

1. Get a spreadsheet program to assist with calculations. Then you should determine the range of time you intend to measure.
2. Using the spreadsheet program, enter the closing share price for your stock on each day of the date range you’ve selected. Repeat the process for the index you are comparing the stock to. Determine the change in price and the change on a percentage basis for every single day.
3. After that, use the formula mentioned below to figure out how the stock and index move together and how the index moves by itself.
4. The formula is: (Stock’s Daily Change % x Index’s Daily % Change) ÷ Index’s Daily % Change.