Calculate Portfolio Beta: Step-by-Step Guide with Examples 2026

Walmart’s stock price has increased by 7% in the past year, compared to the S&P 500’s increase of 18%. Tesla’s stock price has increased by 127% in the past year, compared to the S&P 500’s increase of 18%. Beta can vary depending on the benchmark used to calculate it.

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Understanding beta is part of fundamental stock analysis. That means when the index moves 1%, this portfolio as a whole is 22% more risky than the index. Here is the whole hypothetical portfolio with a total beta of 1.22, benchmarked to the S&P 500.

• If the market goes down by 10%, the portfolio will go down by 11.2%.
• In the landscape of contemporary marketing, driving schools are increasingly recognizing the…
• When Suzanne calculated the market portfolio beta coefficient, the value turned out to be 1.232, indicating a positive beta.
• A beta greater than 1 means that the portfolio is more volatile than the market and tends to amplify the market movements.
• Unsystematic risk can be reduced or eliminated by diversifying your portfolio across different sectors, industries, and companies.
• The ex-ante beta is particularly useful for portfolio managers because it tries to capture how the current position would behave versus the index.
• You can calculate portfolio beta for these 5 stocks using Excel’s SUMPRODUCT function.

Beta = Covariance (Re, Rm) / Variance (Rm)

Using beta to estimate the cost of equity and the WACC has some advantages and disadvantages. This means that the average cost of financing Apple’s assets is 6.4%. Where $w_e$ is the weight of equity, $E(R_e)$ is the cost of equity, $w_d$ is the weight of debt, $(1 – t)$ is the after-tax factor, $R_d$ is the cost of debt, and $t$ is the corporate tax rate. In this section, we will explain how to use beta to estimate the cost of equity and the WACC, and discuss some of the challenges and limitations of this approach. These are some of the ways to adjust beta for leverage, dividends, and other factors.

While it is simple to know if a beta is significant at a specified quantile (‘μ’), by checking if if the p-value is less than μ, it is relatively difficult to know which quantile μ to use. From a computational perspective, one could define the ex-post beta as the solution of the simple linear regression below using a least square method approach. This suggests that periods of large stress for which GBPUSD dropped, the FTSE 250 fell more than portfolio π.5 The results in Figure 2 show the ex-ante and ex-post beta exposures of the FTSE 250 to GBPUSD. To compute the ex-ante beta, we use current positions for a specific date and keep it unchanged in the calculation (see the appendix for further details on the computation).

What Makes Portfolio Beta Important for Your Investments

In contrast, sectors like utilities and food https://demo.joomlatools.com/wordpress/find-a-business-rates-valuation/ tend to be stable, exhibiting lower betas. Some industries (e.g., automotive, tech, retail) are more affected by business cycles, causing higher beta values. From equities and fixed income to derivatives, the CMSA certification bridges the gap from where you are now to where you want to be — a world-class capital markets analyst.

• In this case, we define the ex-post beta as the solution of the simple linear regression using a least square method approach.
• Once you find the weighted beta figures all that is left is to sum them together for the overall portfolio beta.
• Beta should be used in combination with other financial metrics and qualitative factors for robust investment analysis.
• Beta is based on the assumption that the stock and the market have a linear and constant relationship, meaning that the stock’s return changes proportionally to the market’s return.
• This can be done by looking up the beta of each security in a financial database or by calculating it yourself using historical data.
• A beta of 1 means that the asset moves in sync with the market.

Using alpha and beta together can provide valuable insights into the risk and return of a portfolio. Alpha is essentially the excess return you’ve earned on your investments that’s not explained by beta. In simple terms, beta is a measure of volatility compared to “the market”. Understanding how to calculate beta is crucial here, as WACC is only appropriate if the project’s risk matches the how to calculate the beta of a portfolio company’s average risk profile. The more leveraged a company is, the greater its financial risk and the higher its beta.

To calculate the portfolio beta using the CAPM, you will need to know the betas of each of the individual assets in the portfolio. The Capital Asset Pricing Model (CAPM) is a powerful tool used to calculate the expected return of a portfolio based on its risk. Portfolio beta is a useful tool for investors to measure the risk of their portfolios and to compare the risk of different portfolios. This means that the portfolio is slightly more volatile than the overall market, as the portfolio beta is greater than 1. By the end of this article, you should have a better understanding of how to calculate portfolio beta and how it can be used to assess the risk of a portfolio.

Top 3 Formula to Calculate Beta

X can represent anything one needs to calculate the exposure to, such as the S&P 500 Index, the GBPUSD currency cross or any other index. Ex-Ante Beta calculation assumes constant weights for portfolio π over the period.6. This basket also rebalances over a different time horizon, typically every month. For instance, least square estimates are highly sensitive to outlier data points, such as multi-standard deviation moves. In simpler terms, it can be viewed as the percentage of risk explained by the factors used in the model input. Indeed, if the beta is non-significant, then one can’t reject the null hypothesis, which means that beta is likely to be zero.

Beta is influenced by market conditions, and understanding these factors is essential for accurate calculations. Beta consists of systematic risk, representing market movements, https://protelt.com.br/examples-of-temporary-differences-and-permanent/ and unsystematic risk, which is unique to individual securities. This ongoing process helps maintain appropriate risk levels while pursuing targeted financial goals. Sector rotation using ETFs enables tactical beta adjustments based on economic cycles and market conditions. Low-volatility ETFs typically maintain beta coefficients below 0.8, while growth-oriented ETFs often exceed 1.2 beta levels. Market timing considerations also influence beta adjustment strategies.

Understanding Beta and Market Risk

The cost of equity can be calculated using the CAPM and beta, as explained above. If the stock is a technology company, the Nasdaq 100 index might be more appropriate. For example, if the stock is a US large-cap company, the S&P 500 index might be a good choice. The first step is to choose a benchmark index that represents the market or the sector that the stock belongs to. Therefore, beta should be used with caution and updated regularly to reflect the current market conditions.

That’s only a general guideline or rule of thumb, however, as it means that a portfolio’s value is roughly as volatile as the market overall. SoFi’s options trading platform offers https://lestari-sentosa.com/whats-a-pay-period-types-key-considerations/ qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Knowing stock holdings’ betas can be important information when you’re building your portfolios. Investors must also consider stock-specific risk when managing their portfolios. Because beta relies on historical price data, it is subject to change. Stock-specific factors such as debt levels, aggressive management, bold projects, volatile cash flows, and even ESG factors can influence a stock’s idiosyncratic risk.

A beta of 1 means that the investment moves in the same direction and by the same amount as the benchmark. The beta value indicates how sensitive the investment is to the movements of the benchmark. The R-squared value measures how well the line fits the data, ranging from 0 to 1. The slope, b, is the beta of the investment. If we want to calculate the beta of a sector, we can use a sector-specific index, such as the Technology Select Sector SPDR Fund (XLK) for the technology sector.

Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure. A company with a higher beta has greater risk and also greater expected returns. Beta is a financial metric used to evaluate a stock’s volatility and risk relative to the broader market — essential for understanding investment performance.

The Excel formula process involves downloading historical prices, calculating percentage changes, and using the Excel functions for variance and covariance to find beta. The solution is to calculate a project beta using the pure play method. For example, a rare collection of baseball cards still has a beta, but it cannot be calculated using the above method if the last collector sold it 10 years ago and you get it appraised at today’s value.