What is “beta” for an investment or a portfolio, and how do I use it?
A security’s beta is calculated by dividing the product of the covariance of the security’s returns and the market’s returns by the variance of the market’s returns over a specified period. The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market.
How do you explain 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.
What should the beta of your portfolio be?
Typically speaking, equity-oriented assets have betas close to +1.0, core fixed income has beta close to 0.0, alternative investments can have lower but still positive betas and outright portfolio hedges, such as S&P 500 puts, have negative betas.
What does beta tell you in investing?
Beta is a way of measuring a stock’s volatility compared with the overall market’s volatility. The market as a whole has a beta of 1. Stocks with a value greater than 1 are more volatile than the market (meaning they will generally go up more than the market goes up, and go down more than the market goes down).
How do you use beta for stocks?
Key Takeaways
A beta greater than 1 indicates a stock’s price swings more wildly (i.e., more volatile) than the overall market. A beta of less than 1 indicates that a stock’s price is less volatile than the overall market. A beta of 1 indicates the stock moves identically to the overall market.
How do you read a stock beta?
Key Takeaways
- 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.
How do I make a beta portfolio?
Portfolio Beta formula
- Add up the value (number of shares x share price) of each stock you own and your entire portfolio.
- Based on these values, determine how much you have of each stock as a percentage of the overall portfolio.
- Take the percentage figures and multiply them with each stock’s beta value.
What is the beta for a portfolio with an expected return of 12.5 %?
What is the beta for a portfolio with an expected return of 12.5%? Since rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% – 5%), and therefore beta = 1.5.
What is considered a high beta?
What are high-beta stocks? A high-beta stock, quite simply, is a stock that has been much more volatile than the index it’s being measured against. A stock with a beta above 2 — meaning that the stock will typically move twice as much as the market does — is generally considered a high-beta stock.
What stock has the highest beta?
Here’s a look at the eight S&P 500 stocks with the highest betas, according to Finviz.
- Advanced Micro Devices, Inc. …
- United Rentals, Inc. …
- Freeport-McMoRan Inc (NYSE: FCX), 2.51 beta.
- Devon Energy Corp (NYSE: DVN), 2.38 beta.
- Marathon Oil Corporation (NYSE: MRO), 2.31 beta.
- SVB Financial Group (NASDAQ: SIVB), 2.19 beta.
How do I find high beta stocks?
Finding beta of a stock using formula
- Get the historical prices for the desired stock.
- Get the historical prices for the comparison benchmark index.
- Calculate % change for the same period for both the stock and the benchmark index. …
- Calculate the Variance of the stock.
- Find the covariance of the stock to the benchmark.
Is beta a good measure of risk?
The underlying reason that beta is ineffective as an indicator of risk, or the potential for long-term loss of capital, is that beta is simply a measure of share price volatility. The true risk associated with a company is a result of its business fundamentals.
What does a stock beta of 1.5 mean?
Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. [More precisely, that stock’s excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).]
What are low beta stocks?
Low-beta stocks are the ones that are less correlated to the index and tend to be less volatile, unlike high-beta stocks which are more volatile and either gain rapidly or fall sharply.
What is the difference between beta and volatility?
Beta compares the change in a stock’s price with the market, while implied volatility forecasts the future performance of a stock price.
How do you use beta and volatility?
A beta that is greater than 1.0 indicates that the security’s price is theoretically more volatile than the market. For example, if a stock’s beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark.
Is beta a better measure of risk than standard deviation?
Beta coefficient is a measure of an investment’s systematic risk while the standard deviation is a measure of an investment’s total risk. In a portfolio of investments, beta coefficient is the appropriate risk measure because it only considers the undiversifiable risk.
Is beta same as variance?
The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark, divided by the variance of the return of the benchmark over a certain period.
What is the difference between standard deviation and beta?
Beta vs Standard Deviation
Beta shows the sensitivity of a fund’s, security’s, or portfolio’s performance in relation to the market as a whole. Standard deviation measures the volatility or risk inherent to stocks and financial instruments.
What does beta 5Y monthly mean?
5Y just means 5 years of historical price data. If you do 1Y instead of 5Y, you would get less data points because the period is shorter. Simple statistics would tell you this is bad because there will be a lot more variability for 1Y.
What is the beta of Walmart stock?
Stock Price History
| Beta (5Y Monthly) | 0.51 |
|---|---|
| 52-Week Change 3 | -13.28% |
| S&P500 52-Week Change 3 | -13.02% |
| 52 Week High 3 | 160.77 |
| 52 Week Low 3 | 117.27 |
What is the beta for Coca Cola?
Stock Price History
| Beta (5Y Monthly) | 0.59 |
|---|---|
| 52 Week High 3 | 67.20 |
| 52 Week Low 3 | 52.28 |
| 50-Day Moving Average 3 | 63.45 |
| 200-Day Moving Average 3 | 59.42 |