Beta of a portfolio? (2024)

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Beta of a portfolio?

The beta of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio. E.g., if 50% of the money is in stock A with a beta of 2.00, and 50% of the money is in stock B with a beta of 1.00,the portfolio beta is 1.50.

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How do you calculate beta in a portfolio?

Stock beta formula

The formula for the beta of an individual stock within a portfolio takes the covariance divided by the variance. Investors can also find the correlation between the market index standard, multiply it by the stock's standard deviation and divide it by the market index's standard deviation.

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What does a portfolio beta of 1 mean?

Beta is calculated using regression analysis. A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.

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Is the beta of a portfolio always 1?

The beta of market portfolio is always one. Because beta measures the sensitivity of an asset to the movements of the overall market portfolio, and the market portfolio obviously moves precisely with itself, its beta is one.

(Video) How to Compute Stock/Portfolio Beta
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How do you interpret the beta of a portfolio?

Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.

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What is the easiest way to calculate beta?

Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation between the security's returns and the benchmark's returns.

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How do I calculate beta?

Beta can be calculated by dividing the asset's standard deviation of returns by the market's standard deviation. The result is then multiplied by the correlation of the security's return and the market's return.

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Is a beta higher than 1 good?

A beta of 1 indicates that a stock's volatility is in line with the overall market. This can be seen as a neutral or average level of risk. Stocks with betas less than 1 are generally considered less risky than the market, while stocks with betas greater than 1 are generally considered more risky.

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What is a good beta for a stock?

What Is a Good Beta Value for a Stock? Whether or not a stock has a “good†beta value depends on what you are looking for in a stock. If you're risk averse, then look for a stock with a beta value at or below 1.0. If you're looking for something more exciting, then consider a stock with a value of above 2.0.

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What is the beta of a 2 stock portfolio?

What is portfolio beta? A portfolio beta is nothing but the weighted sum of the individual asset betas. If your portfolio consists of two stocks and half of your money is in Stock X with a beta of 2.00 and the remaining in Stock Y with a beta of 1.00, your portfolio beta is 1.50.

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What if the beta is less than 1?

A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. For example, utility stocks often have low betas because they tend to move more slowly than market averages.

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What does a beta of 1.5 mean?

What does a stock beta of 1.5 mean? A stock beta of 1.5 means that a stock's volatility is 1.5 times that of the overall stock market. The price is moving up or down at a higher rate than the S&P 500 has over the past few years.

Beta of a portfolio? (2024)
What does a beta of 0.8 mean?

For example, a stock with a beta value of 0.8 means that stock is only 80% as volatile with its price swings compared with the overall market index. Another way to look at this is that the stock is 20% less volatile than the overall stock market.

Should portfolio beta be high or low?

Stocks with a beta above 1 tend to be more volatile than their index, while stocks with lower betas tend to be less volatile. High-beta stocks tend to increase a portfolio's overall volatility and low-beta stocks tend to decrease it. However, beta is a backward-looking metric which only measures one kind of risk.

Do low-beta stocks outperform?

Also importantly, negatively correlated securities would be expected to rise when the overall market falls, or vice versa. Interestingly enough, as of late, low-beta stocks have been outperforming the market, offering investors long-term options with a lower risk.

Does a high beta portfolio outperform?

High beta stocks are positively correlated with returns of the S&P 500, but at an amplified magnitude. These stocks outperform in bull markets but can underperform in bear markets.

What does negative beta mean in stocks?

A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta. This is because, as the returns available from the market fall, lending rates will generally rise.

What is beta and how is it measured?

Beta is a statistical measure of the volatility of a stock versus the overall market. It's generally used as both a measure of systematic risk and a performance measure. The market is described as having a beta of 1. The beta for a stock describes how much the stock's price moves compared to the market.

How do you calculate the beta of a portfolio in Excel?

To calculate beta in Excel:
  1. Download historical security prices for the asset whose beta you want to measure.
  2. Download historical security prices for the comparison benchmark.
  3. Calculate the percent change period to period for both the asset and the benchmark. ...
  4. Find the variance of the benchmark using =VAR.

What is an example of a portfolio beta?

The beta of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio. E.g., if 50% of the money is in stock A with a beta of 2.00, and 50% of the money is in stock B with a beta of 1.00,the portfolio beta is 1.50.

How do you calculate alpha and beta of a portfolio?

Calculation of alpha and beta in mutual funds
  1. Fund return = Risk free rate + Beta X (Benchmark return – risk free rate)
  2. Beta = (Fund return – Risk free rate) ÷ (Benchmark return – Risk free rate)
  3. Fund return = Risk free rate + Beta X (Benchmark return – risk free rate) + Alpha.

How do you calculate the beta of a CAPM?

To calculate a CAPM beta, subtract the expected market return from the expected investment return, then divide by the result of the market return minus the risk-free return.

Which stock has highest beta?

High Beta Stocks
S.No.NameCMP Rs.
1.Lloyds Metals454.50
2.Apar Inds.3512.55
3.Britannia Inds.5066.75
4.Balaji Amines2277.10
23 more rows

Why would a stock have a low beta?

A beta lower than one suggests that a stock is less risky than the market. A beta of . 5 suggests that the stock is 50% less volatile than the market. Adding this type of stock to a portfolio lowers the overall risk but has a similar effect on potential return.

Should you buy a stock with low beta?

The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.

What is considered an aggressive stock beta?

A company stock with beta greater than one is called an aggressive stock. If beta is less than one, the returns on the company stock are less volatile than the market return. A company stock with beta less than one is called a defensive stock.

What is Tesla's beta?

Safety Score Beta | Tesla Support. The Safety Score Beta is an assessment of your driving behavior based on several metrics called Safety Factors.

What is the average beta of all stocks?

Most stocks have betas between 0 and 3. Treasury bills (like most fixed income instruments) and commodities tend to have low or zero betas, call options tend to have high betas (even compared to the underlying stock), and put options and short positions and some inverse ETFs tend to have negative betas.

What is the beta of an S&P 500 index fund?

The beta of the S&P 500 is expressed as 1.0. The beta of an individual stock is based on how it performs in relation to the index's beta. A stock with a beta of 1.0 indicates that it moves in tandem with the S&P 500.

What is the beta of a diversified portfolio?

The beta of a stock or portfolio will tell you how sensitive your holdings are to systematic risk, where the broad market itself always has a beta of 1.0. High betas indicate greater sensitivity to systematic risk, which can lead to more volatile price swings in your portfolio, but which can be hedged somewhat.

When a stock has a beta of 1.5 the expected return?

Hence, the expected return when the beta of the stock is 1.5 will be 18%, and the expected return when the beta of the stock is 1.27 will be 16.02%.

Is a beta of 2 bad?

A beta of two means the stock is twice as volatile as the overall market. A beta of 0.50 means the stock is half as volatile. If the S&P 500 index rises or falls 10%, you'd expect a stock with a beta of two to move 20%. A stock with a beta of 0.50 would typically move just 5% when the benchmark index moves 10%.

What does a beta of 0.2 mean?

If your industry has a beta of 0.2, it is only 20% as risky as the index. That means if the S&P 500 loses 10%, your industry only loses about 2%.

What does a beta of 0.9 mean?

A fund can also have a beta that is lower than the benchmark index. In that case, if the fund's beta is 0.9, an investor can expect the fund to perform 10% worse than the index in up markets, and 10% better in down markets. For example, if the index gains 10%, the fund would be expected to gain 9%.

What does a beta of 0.70 mean?

Anything less than 1 represents an asset less volatile than the market, while greater than 1 suggests a more volatile asset. For example, a beta of 1.2 means the asset is 20% more volatile than the market. Conversely, a beta of 0.70 is theoretically 30% less volatile than the market.

Is a beta of 1.2 good?

If a stock has a beta of 1.2, it might be considered 20 percent riskier than the benchmark and therefore should compensate investors with a higher expected return.

What does a beta of 0.05 mean?

For example, if beta risk is 0.05, there is a 5% likelihood of inaccuracy. Beta risk is sometimes called "beta error" and is often paired with "alpha risk," also known as a Type I error.

Is beta 0.7 good?

A Beta value of 1.0 indicates that the investment is as volatile as the baseline index. If the Beta value is 1.3, the investment is 30% more unstable than the benchmark. If the Beta is 0.7, that means the stock is 70% less unstable than the index.

Which is better portfolio alpha and beta?

Alpha vs. beta in investing
AlphaBeta
Measures actual return vs. expected returnMeasures volatility
Represented as a percentageRepresented as a decimal
A high alpha represents a greater return for the investorA high beta represents greater risk for the investor
Apr 19, 2023

How do you know if a stock is undervalued using beta?

If a security's expected return versus its beta is plotted above the security market line, it is considered undervalued, given the risk-return tradeoff.

Do growth stocks have higher beta?

Value investors want high beta so they can profit by buying and selling at cyclical lows and highs. Growth investors want low beta so that the stock's performance reflects mainly underlying growth trends.

Which stocks have beta less than 1?

Low Beta
S.No.NameQtr Profit Var %
3.Guj.St.Petronet-15.61
4.HDFC AMC9.50
5.C D S L-18.74
6.Deepak Nitrite-12.48
23 more rows

Is Tesla high beta?

Remember, a high alpha is always good. Beta, on the other hand, measures the volatility (or risk) of an investment. It is an indication of Tesla Inc stock's relative risk over its benchmark. Tesla Inc has a beta of 1.53 .

What industries have low betas?

The sectors that ranked lowest in beta are about what we'd expect. Consumer staples (things people buy in good times and bad), as well as utilities (the light and power we take for granted in the developed world), led the way with betas of 0.57 each.

Does higher beta increase cost of equity?

The higher the volatility, the higher the beta and relative risk compared to the general market. The market rate of return is the average market rate. In general, a company with a high beta—that is, a company with a high degree of risk—will have a higher cost of equity.

How do you calculate beta of a portfolio using CAPM?

CAPM Beta Formula

To calculate a CAPM beta, subtract the expected market return from the expected investment return, then divide by the result of the market return minus the risk-free return.

How do you calculate beta of a portfolio in Excel?

To calculate beta in Excel:
  1. Download historical security prices for the asset whose beta you want to measure.
  2. Download historical security prices for the comparison benchmark.
  3. Calculate the percent change period to period for both the asset and the benchmark. ...
  4. Find the variance of the benchmark using =VAR.

What is the beta in the CAPM formula?

The beta (denoted as “Ba” in the CAPM formula) is a measure of a stock's risk (volatility of returns) reflected by measuring the fluctuation of its price changes relative to the overall market. In other words, it is the stock's sensitivity to market risk.

How to interpret beta in CAPM?

It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model (CAPM). A company with a higher beta has greater risk and also greater expected returns. The beta coefficient can be interpreted as follows: β =1 exactly as volatile as the market.

Is beta in CAPM levered or unlevered?

If unlevered means “without debt”, you can probably guess that levered beta means “with debt.” Levered beta is important because it is notably used in the CAPM formula which is designed to estimate a company's cost of equity.

How do you calculate a portfolio beta quizlet?

Determine the weight each stock represents in the portfolio, and multiply that by each beta, and then add them together to get the portfolio beta, which is bp = 0.8350 = Portfolio beta.

What is alpha and beta in CAPM formula?

Jensen's alpha takes into consideration the capital asset pricing model (CAPM) market theory and includes a risk-adjusted component in its calculation. Beta (or the beta coefficient) is used in the CAPM, which calculates the expected return of an asset based on its own particular beta and the expected market returns.

What is portfolio alpha and beta?

Alpha and beta are two different parts of an equation used to explain the performance of stocks and investment funds. Beta is a measure of volatility relative to a benchmark, such as the S&P 500. Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations.

What is the beta coefficient of this portfolio?

A beta coefficient is used as a measure of a security's or portfolio's systematic risk as compared to the market. The beta coefficient is calculated as the covariance of the security's or portfolio's returns with the market's returns, divided by the variance of the market's returns.

Is there a beta formula in Excel?

Step 5 – Calculate Beta – Three Methods

For using this function in excel, you need to go to the Data Tab and select Data Analysis. Select Data Analysis and click on Regression. As noted above, you get the same answer of Beta (Beta Coefficient) in each of the methods.

What is the difference between beta and standard deviation?

While standard deviation determines the volatility of a fund according to the disparity of its returns over a period of time, beta, another useful statistical measure, compares the volatility (or risk) of a fund to its index or benchmark.

Is beta in CAPM the slope?

This study exposes the meaning and role of the Capital Asset Pricing Model (CAPM) and lays out the key elements that make it work.

References

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