Diversification can also help reduce the volatility in your portfolios, allowing you to see steady growth without wild swings in the value of your assets. That’s when beta becomes important. Beta is a measure of a stock’s sensitivity to changes in the overall market. You can measure the beta in your portfolios with some basic math. Learn more about how to calculate the volatility, or beta, of your portfolio.
How Do You Calculate the Beta of a Portfolio?
First, it’s important to understand that beta is measured on a scale comparing an individual investment to a benchmark index like the S&P 500. A beta of 1.0 indicates that its volatility is the same as the benchmark. In other words, it moves in tandem with the benchmark. 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%. You can determine the volatility of your portfolio by examining the beta of each holding and performing a relatively simple calculation. It’s simply a matter of adding up the beta for each security and adjusting according to how much of each you own. This is called a “weighted average.”
Four Steps for Calculating Beta
Beta for individual stocks is readily available on the websites of most online discount brokerages or reliable investment research publishers. To determine the beta of an entire portfolio of stocks, you can follow these four steps: Let’s illustrate by calculating the beta on this fictional portfolio of six stocks.
How to Calculate Beta for Individual Stocks
You may not have much reason to calculate beta for individual stocks, as those figures are readily available. However, there may be times when you find it useful to crunch these numbers yourself. It’s important to understand that beta can be calculated over various time periods. Stocks can be volatile over the short term, but they are generally stable over many years. For this reason, you may wish to calculate beta yourself to get a more precise answer. Calculating beta on your own can also be educational because it allows you to examine price movements in great detail. Some models for calculating a stock’s beta are very complex, but we’ll use the most straightforward approach here. Follow these basic steps:
