The beta of a stock measures its riskiness and volatility in comparison to the market in general. A stock with a beta of 1 has approximately the same risk and volatility as the market as a whole. Betas higher than 1 are more risky, while betas lower than 1 are less risky. Calculating the weighted average beta of a portfolio allows you to measure the overall risk of your portfolio. Using a weighted average accounts for the fact that you're investing different amounts in each stock, so the betas of the stocks that you own more of will affect the portfolio beta more than stocks you own few of. However, a high weighted average beta isn't always a bad thing if you're adequately compensated for taking on the risk with high returns.
Multiply the amount invested in each stock by the stock's beta. For example, if you have $2,000 invested in a stock with a beta of 1.2 and $4,000 invested in a stock with a beta of 1.05, multiply $2,000 by 1.2 to get $2,400 and multiply $4,000 by 1.05 to get $4,200.
Add the results. In this case, add $2,400 and $4,200 to get $6,600.
Divide the result by the value of the portfolio to find the weight average beta of the stocks in the portfolio. In this case, divide $6,600 by $6,000, the value of the portfolio, to get a weighted average beta of 1.1 for the portfolio.
- Thinkstock/Comstock/Getty Images
- How Do I Calculate Rate of Return of a Stock Portfolio?
- How to Calculate Unrealized Gain
- How to Find Out What Percentage of Your Portfolio Each Stock Makes Up?
- How to Compute the Holding Period Return on an Investment
- How to Calculate the Average Return on a Portfolio of Stocks
- How to Calculate the Common Stock Account Balance After a Stock Split
- How to Evaluate Stock
- How to Calculate Rate Earned in Common Stock