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How to Calculate the Beta of Your Portfolio: Formula + Examples
Key Takeaways
Copy link to section- Portfolio beta is a measure of volatility. It shows how volatile your investments are compared to a market benchmark like the S&P 500.
- A beta greater than 1.0 indicates higher volatility than the market. For example, a beta of 1.2 means 20% more volatility than the market.
- A beta less than 1.0 indicates lower volatility than the market. While a beta of exactly 1.0 means your portfolio is exactly equal to the volatility of the overall market.
What is Portfolio Beta?
Copy link to sectionPortfolio beta measures the overall volatility of your portfolio compared to a benchmark like the S&P 500.
Beta has three levels: 1, below 1, and 0.
- A beta above 1 means your portfolio is more volatile compared to the market.
- A beta below 1 shows your portfolio is less volatile than the market.
- A beta of 0 means there is no correlation with market movements.
Beta Portfolio Formula
Copy link to sectionPortfolio Beta = (Weight of Asset A × Beta of Asset A) + (Weight of Asset B × Beta of Asset B) + …
Weight of Asset: This is the proportion of the portfolio’s total value that an asset represents.
Beta of Asset: This is the asset’s beta value, representing its volatility compared to the market.
How to Calculate Portfolio Beta
Copy link to sectionIn plain language, this is what you need to do:
- Find out how much of your portfolio is in each asset (this is the weight).
- Multiply the weight of each asset by its beta (its sensitivity to the market).
- Add up all these values to get your portfolio’s beta.
For example:
If you invest 50% of your money in Asset A (beta = 1.2) and 50% in Asset B (beta = 0.8), your portfolio beta would be:
(0.5 × 1.2) + (0.5 × 0.8) = 1.0
The portfolio beta of 1.0 means your portfolio moves in line with the market.
Step-by-Step Guide of How to Calculate Portfolio Beta
Copy link to sectionFind the Beta of Individual ssets
Copy link to sectionLook up the beta values of each stock or asset in your portfolio. These are often available on financial websites or through brokerage platforms.
Determine the Weights
Copy link to sectionCalculate the proportion of each asset in the portfolio. For example:
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- If you have $20,000 in Stock A and $30,000 in Stock B, the total portfolio value is $50,000.
- Weight of Stock A = $20,000 / $50,000 = 0.4 (40%)
- Weight of Stock B = $30,000 / $50,000 = 0.6 (60%)
Apply the Formula
Copy link to section-
Portfolio Beta = (0.4 × Beta of Stock A) + (0.6 × Beta of Stock B)
Use our custom calculator below to learn more about your portfolio:
Conclusion
Copy link to sectionPortfolio beta is a vital tool for assessing your investment risk.
It measures how your portfolio’s returns move relative to the market, helping you gauge potential volatility and return expectations.
Understanding beta values and their impact can guide you in balancing risk and reward.
Whether you’re building a low-risk portfolio or aiming for higher returns, beta helps you make smarter investment decisions.
