The weight of an asset in an investment portfolio is a representation of what percentage of the portfolio's total value is tied up in that specific asset. Calculating the weights of each asset in a portfolio is the crucial first step in assessing the portfolio's past or expected future risk as well as return. Unlike fancier parameters, such as volatility or beta – which require advanced math and usually a spreadsheet to calculate – you can find the weight of assets in a portfolio simply by using a calculator.
Multiple Assets by Market Value
Multiply the number of each asset in your portfolio by the current market value of the respective asset. Use the most recent prices and not the price you originally paid to purchase the assets.
Assume that your portfolio consists of stocks A and B, and Bond C, of which you hold 100, 120 and 50 pieces respectively. Further assume that stock A trades at $40 per share at the moment, stock B is priced at $50 per share, and each unit of Bond C is trading at $90. Multiply 100 by $40, 120 by $50 and finally 50 by $90. The results are $4,000, $6,000 and $4,500, respectively.
Calculate Total Present Portfolio Value
Add up the figures you have calculated by multiplying the number of each asset by the unit value of the assets. In our example, you would add $4,000, $6,000 and $4,500, resulting in $14,500. This figure is the present total value of your portfolio.
If you were to sell all assets today, you would end up with this much cash, less the sales commissions. If you receive periodic account statements from your broker, this figure is probably reported. It is, however, always a good idea to calculate it manually, as the prices of assets might have changed since your last statement and the total value of the portfolio might, therefore, have moved up or down.
Determine Individual Portfolio Weights
Divide the figures you found for each asset (by multiplying its number and unit price) in Step 1, by the total portfolio value you calculated in Step 2.
The individual total values you calculated in Step 1 were $4,000, $6,000 and $4,500. The total portfolio value is $14,500. Dividing $4,000 by $14,500 results in 0.28; $4,500 divided by $14,500 equals 0.31; $6,000 divided by $14,500 equals 0.41.
These figures are the individual weights of each asset in the portfolio. So stocks A and B have weights of 0.28 and 0.31, while the weight of Bond C is 0.41. Add them up to check if the total weight of all assets equals 1, which should always be the case.
If you wish to express the weights as a percentage, simply multiply the weights by 100. In this case, the percentage weights of the three securities equal 28 percent, 31 percent and 41 percent.
References
Writer Bio
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.