Investors, whether beginner or seasoned professionals, all have a threshold for risk. Some prefer to play it safe and favor a low-risk investment plan while others are more advantageous with a “high risk, high return” mindset. This information can often be found on financial news websites, investment research tools, or from a broker.
Steps to Calculate Portfolio Beta
Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.
How to Interpret Portfolio Beta?
In this formula, levered beta (BL) can be sourced online or calculated using one of the previously discussed methods. The total debt (D) is located in the company’s balance sheet, part of its financial statements. The market capitalization, or total market value of the company’s equity (E), is calculated by multiplying the current stock price with the total number of outstanding shares.
How to Calculate and Interpret Stock and Portfolio Beta
To do this, just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. One distinct advantage of calculating the beta yourself is the ability to gauge the beta’s reliability by calculating the coefficient of determination, or as it is better known, the r-squared. This is a powerful tool that can determine how well your beta measures risk. As mentioned in the beta stock calculator, the beta of a stock or the beta of a portfolio is a value that measures the extra risk we take over the market risk.
- Her expertise is in personal finance and investing, and real estate.
- Financial feeds like Yahoo Finance and Google Finance commonly list beta amid other financial data, such as stock price or market value.
- Unlock smarter investing with StableBread’s Automated Stock Analysis Spreadsheet.
First, let’s get familiar with the beta formulas for both a stock and a portfolio and then see how an investor would complete the calculations for each. In this article, we give a step-by-step 6 best free or low-cost coinbase alternatives for 2020 breakdown of how to calculate portfolio beta. The calculation of beta through regression is simply the covariance of the two arrays divided by the variance of the array of the index.
Anything over 1.0 indicates a higher sensitivity to market volatility. For example, a portfolio with a beta3 greater than 1.0 is prone to being more unstable and may go up or down more than the market goes up or down. Beta, represented by the Greek symbol β, describes the relationship between the returns of a stock and the returns of the overall market. This portfolio has a beta of 1.26, indicating it’s expected to be 26% more volatile than the market. This computes a beta value for Apple’s stock (0.77 in the example, taking daily data and an estimated period of three years, from April 9, 2012, to April 9, 2015).
Many experts agree that while Beta provides some information about risk, it is not an effective measure of risk on its own. Beta only looks at a stock’s past performance relative to the S&P 500 and does not provide any forward guidance. It also does not consider the fundamentals of a company or its earnings and growth potential. Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may add gains as well.
While it may be tempting to go outside of your ranges to skew the outcome, resist the urge to over-manipulate the data. Keep your betas, market return and risk-free rates within a set range. To determine the weight of your stock, calculate the total amount of each stock and what percentage it is of the overall portfolio and multiply by 100 https://cryptolisting.org/ to convert it to a percentage. Calculating beta by hand is not the most efficient way to get the answers you need regarding portfolio volatility. Especially if you hold a substantial amount of assets within a portfolio. While we don’t expect you to be a math pro, we encourage you to have at least a high-level command of the calculations.
Unlock smarter investing with StableBread’s Automated Stock Analysis Spreadsheet. Effortlessly analyze company fundamentals, financial statements, and valuations. The choice of method ultimately doesn’t impact the end result of obtaining the beta value. In short, these considerations are fundamental in ensuring the accuracy and relevance of your beta calculation.
