If you’d like to learn more about why this formula for portfolio beta works the way it does, and if you want to understand how exactly it works, then keep reading. In the table above, the value of the stock in the portfolio and the proportion or share of the portfolio of each stock can be seen in the first two columns. The sum of the weighted betas in the furthest column to the right gives you the overall beta of the portfolio. This is one good reason that portfolio managers give importance to the beta of a portfolio. A stock with a beta of 1.0 has the same rate of return as the market to which you’re comparing it.

## Step 1. Find your stock(s) value

Levered beta (βL), also known as equity beta, reflects the volatility of a stock, including the impact of the company’s capital structure (its mix of debt and equity). Beta can provide some risk information, but it is not an effective measure of risk. Beta only looks at a stock’s past performance relative to the S&P 500 and does not predict future moves.

## How To Calculate Portfolio Beta – Final Thoughts

It also does not consider the fundamentals of a company or its earnings and growth potential. If, on the other hand, you want to expose yourself to greater market risk, then a good portfolio beta would be https://cryptolisting.org/ some “reasonable” value that is greater than 1. Mindle Plc has a negative beta equal to -0.04, which is very close to 0, meaning it’s the least risky of the 5 stocks (relative to the market portfolio).

## Weightage of Assets in the Portfolio

One advantage we discussed earlier is the ability to gauge the reliability of your beta. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

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A gold exchange-traded fund (ETF), such as the SPDR Gold Shares (GLD), is tied to the performance of gold bullion. Consequently, a gold ETF would have a low beta and R-squared relationship with the S&P 500. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&P 500.

Conceptually, the portfolio beta is the expected volatility in returns relative to the market as a whole. Avoiding high risk and seeing a high return is a balancing act of diversification and accurate valuation. While it may be tempting to go outside of your ranges to skew the outcome, resist the urge to over-manipulate the data. Beta is a key metric used to identify an individual stock or portfolio’s level of volatility against the market standard.

Alright, now that you know how to calculate portfolio beta manually, let’s see how we can calculate it on Excel. Jo’s portfolio beta is therefore approximately equal to 1.13 meaning it is slightly riskier than the market portfolio. Now, if you’re wondering how to calculate portfolio weights, then check out the linked article which goes over the estimation of portfolio weights in great detail in the context of portfolio returns. The portfolio beta is used to manage the exposure to the systematic risk of an already diversified portfolio. Put simply, it represents the systematic risk of your investment portfolio as a whole.

Betas can be calculated in a number of ways since the variables for input depend on your investment time horizon, your view of what constitutes “the market,” and several other factors. On the other hand, the unsystematic one represents the risk of your individual asset. In other words, the additional risk you take when you invest in understanding hash rate a particular investment. Has your company got problems in their supply chain or delivering their products? The beta of a stock intends to measure that extra risk over the market risk. These user-friendly tools typically require asset weights, beta values, and historical data input to generate the portfolio’s overall beta swiftly.

Read on to learn more about using beta calculations to identify risk and volatility. Using a stock screener with powerful financial analysis is the easiest way to calculate complex financial ratios like Beta. Stock Rover, our review-winning stock research and analysis screener, makes calculating Beta easy. Beta can give you an estimate of a stock’s risk and some idea of market volatility.

In the process of calculating portfolio beta, gathering historical price data is essential. Investors need to retrieve accurate and reliable historical price information for all assets in the portfolio. This data is the foundation for computing asset beta, determining correlations, and assessing the portfolio’s risk and volatility. Access to reliable financial databases or online resources is crucial to ensure the accuracy and quality of the data used in the analysis. The average beta is a measure of systematic risk that compares the volatility of a stock or portfolio to the overall market.

- That stability is also evident in the stock’s low beta of around 0.7, which indicates it moves at a more relaxed pace than the general markets.
- His contributions play a crucial role in the company’s success, ensuring efficiency and effectiveness across different departments.
- Passive strategies, such as index funds, aim to replicate the performance of a specific market index.
- Beta gives analysts an estimate of the stock’s risk and market volatility.

They save time and eliminate the need for complex manual calculations, making it easier for novice and experienced investors to assess their portfolio’s risk exposure accurately. However, users should ensure the reliability and credibility of the chosen calculators and consider validating the results through multiple sources for a comprehensive analysis. Since beta is based on price and determined relative to the market; however, it may not be the best assessment of risk for some stocks. To accurately determine the risk of a stock, take into account the company’s fundamentals, its earnings and business prospects and the future market for its products or services.

Computing Portfolio Beta using the Weighted Average Method involves calculating the weighted sum of individual asset betas based on their proportional contribution to the portfolio. By considering both asset returns and their respective weights, this method allows investors to assess the overall risk of their portfolio. Calculating asset beta involves employing regression analysis, a statistical method to quantify the relationship between an asset’s historical and market returns. The regression model identifies the asset’s sensitivity to market fluctuations, represented by the beta coefficient.

While our example below discusses beta in the context of stocks, beta can be calculated for bonds, mutual funds, exchange-traded funds, and other investments. A number higher than 1.0 indicates more volatility than the benchmark, while a lower number indicates more stability. For example, a stock with a beta of 1.2 is 20% more volatile than the market, which means if the S&P falls 10%, that stock is expected to fall 12%. Perhaps the most important thing to consider when building an investment portfolio is your level of diversification. When you spread your investments across a broad number of companies, industries, sectors, and asset classes, you may be less heavily affected by one market event. Also, the greater the possibility of obtaining better results than the market.

To be safe your ranges should mimic the high, low, and average betas from the previous years ranging from 1 to 10 years. Once you find the weighted beta figures all that is left is to sum them together for the overall portfolio beta. Calculating beta by hand is not the most efficient way to get the answers you need regarding portfolio volatility.

You have the option to use any of the three methods previously discussed for calculating stock beta to determine the beta for each security in your portfolio. The main difference is that you’ll be sourcing historical closing prices for all the stocks in your portfolio, rather than just one stock and a market index. Begin by sourcing the historical closing prices for both the stock and a market index, like the S&P 500, over an identical period. Reliable historical price data can be obtained from various sources, Yahoo Finance being one popular option. To calculate the beta of a stock in Excel, you’ll need to perform a regression analysis, assessing the relationship between the stock’s performance and that of the overall market. Calculating the beta of a stock is essential for evaluating its risk relative to the market.

Understanding how beta is used in real-world investment decisions and portfolio management is essential for investors and financial professionals. Building on this foundation, the distinction between levered and unlevered beta further refines risk analysis. Levered beta accounts for the impact of a company’s debt, offering a view of both business and financial risk. In contrast, unlevered beta focuses exclusively on business risk, thereby excluding the influence of financial leverage. This differentiation is essential for a nuanced understanding of a company’s true risk profile.

Desjardins Global Asset Management Inc. raised its stake in shares of monday.com by 222.0% during the 4th quarter. Desjardins Global Asset Management Inc. now owns 132 shares of the company’s stock valued at $25,000 after buying an additional 91 shares during the last quarter. Now owns 34,044 shares of the company’s stock valued at $65,000 after buying an additional 691 shares during the last quarter. PNC Financial Services Group Inc. raised its stake in shares of monday.com by 373.5% during the 4th quarter. PNC Financial Services Group Inc. now owns 393 shares of the company’s stock valued at $74,000 after buying an additional 310 shares during the last quarter.

Shares of Home Depot are up around 5% this year, which is well below the S&P 500’s gains of 16%. But as interest rates come down and discretionary spending starts to rise, the stock could quickly become a hot buy again. For retirees, now could be an optimal time to load up on what’s still a strong business. That stability is also evident in the stock’s low beta of around 0.7, which indicates it moves at a more relaxed pace than the general markets. For a good dividend stock to rely on for the foreseeable future, Abbott Labs could make an ideal option to hang on to here. What’s also appealing about this stock for retirees is that its operations are diverse.