How to Calculate Your Portfolio Beta - Stock Market Tips - YouTube

Hey guys what is up Kevin Biroun here bring guys  a brand new video in today's video lesson we're  

going to be looking at how to calculate the  beta of your portfolio now some of you might  

be wondering well Kevin why would I calculate the  beta of my portfolio now if any of you happen to  

tune into financial television whether it's CNBC  Bloomberg or Yahoo Finance if you watch any of  

those programs you'll often see investors talking  about rebalancing their portfolios and the way  

they're able to achieve this is by readjusting  the betas of their portfolio in order to have  

more defensive more aggressive or market neutral  positioning as the economic conditions shift over  

time so one a good example that you should take  into consideration is the march 2020 crash of  

the stock market that coincided with the onset of  the covet 19 pandemic one of the funds that really  

outperformed during that time period was the ark  innovation fund which is managed by Cathy Wood  

and one of the major characteristics of this fund  is the fact that it's a high beta portfolio the  

major criticism that people have for fund  managers such as Cathy wood is that these  

fund managers fail to rebalance their portfolios  properly as economic conditions develop over time  

and you know if you look at the ark innovation  fund today it isn't doing nearly as well as it was  

during that time period where you had loose  monetary policy but with that being said we  

don't need to commit the same mistakes that Cathy  wood made with her fun as investors we can learn  

to rebalance our portfolios we can learn to adjust  the betas in order to achieve more defensive more  

aggressive more market neutral positioning by  doing so we can reduce uh the risk that we are  

subject to as investors with that let's hop into  today's example and let's help you guys figure  

out how to calculate the betas of your portfolio  but before doing so actually I want to take the  

time to thank everybody for subscribing to this  channel we were actually able to get the channel  

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with your friends and family and with  that let's get to these lessons started

So here we are with the example we have Jimmy who  is an investor with three stocks in his portfolio  

more specifically he has 20 000$ invested in Coca  Cola 60 000$ in tesla and 80 000$ in JP Morgan  

Chase and the betas of these stocks are 0.54 2.18  and 1.14 respectively now the question is asking  

you to determine the beta of the portfolio and to  comment on jimmy's positioning as an investor so  

the first step in solving this sort of a question  is by finding the total value of the portfolio  

so we're going to go ahead and write down our  equation so total value total value is equal to  

and the total value is just how much money you  have invested in total in your portfolio right so  

in this case it's mentioned that jimmy has 20 000$  in Coca Cola so we put that in it says that he has  

60 000$ in Tesla so we add that in as well and he  has 80 000$ and JP Morgan Chase so if we sum up  

all these values we're going to get the total  value of Jimmy's portfolio which is in this case  

a hundred sixty thousand dollars now that we've  calculated the total value of Jimmy's portfolio  

we have to determine the market weights of each  stock in his portfolio so we're going to start  

things off with Coca Cola so Coca Cola is going  to be 20 000$ divided by 160 000$. And if we punch  

that into our calculator we're going to get 0.125  or 12.5 percent for Tesla it's going to be 60 000$  

divided by 160 000$ and the weight for this is  going to be 0.375 or 37.5 and for JP Morgan we're  

going to abbreviate it as JPM it's going to be 80  000$ divided by 160 000$ and this is going to be  

a weight of 0.5 or 50 percent so now we  have everything that we need to calculate  

the portfolio beta and the way that the portfolio  beta is computed is via the following equation so  

portfolio beta is equal to the sum of the weighted  average betas so in this case since Jimmy has  

three stocks in his portfolio the equation would  write as follows so you would have the weights  

of Coca Cola multiplied by the beta of Coca Cola  plus the weight of tesla multiplied by the beta of  

tesla plus the weight of JP Morgan multiplied by  the beta of JP Morgan and this equation would give  

you a portfolio beta for Jimmy's particular case  so if we go ahead and write out the equation for  

this example you're going to have 0.125 multiplied  by the beta for Coca Cola which was given as 0.54  

plus the weight of Tesla which was 0.375 and  that's going to be multiplied by its beta which  

was 2.18 and then we're going to add that to the  weight of JP Morgan which was 0.5 in this case  

multiplied by its beta which was 1.14 and if we  sum all of this up we're going to get the beta  

which should be in this case you should get  a beta of 1.455 so now that we've calculated  

the portfolio beta for Jimmy's particular case we  need to comment on his positioning as an investor  

but before being able to do so we're gonna have  to take a couple of notes so let's go ahead and  

do that so a couple of notes on beta now I'm not  sure if you guys have covered this in the past but  

beta is a measure of systematic risk it is  a measure of volatility and so if you have  

a scenario where the beta is less than one we call  these sorts of portfolios defensive and the reason  

why we call them defensive is because uh when you  have the beta being less than one the expectation  

is that the volatility and systematic risk of the  portfolio or stock is going to be less than that  

of the overall market hence the name defense  moving on we have a case where the portfolio  

beta could be equal to one uh for those of you  who also don't know the market beta is equal to  

one so when you have a portfolio that also has  a beta of one it means that the systematic risk  

the volatility of your portfolio is going to be  matching that of you know the benchmark market  

which could be the S&P 500 for example and  due to this we call these sorts of portfolios  

market neutral right it's neither defensive nor  aggressive and finally if you have a portfolio  

beta which is greater than one we call these  sorts of portfolios aggressive and the reason  

they're called aggressive is because we expect the  volatility of these portfolios to be far greater  

than that of the overall market and you know  during the Covid 19 pandemic the ark innovation  

fund was a star performer precisely because it's  an aggressive portfolio but moving towards our  

example we did calculate a beta of 1.455 and if we  were to if we were to qualify this with regards to  

you know the criteria that we've listed there for  beta uh since the beta portfolio is greater than  

one we would say that this portfolio is aggressive  so recall that earlier in my video I had mentioned  

that investors could use portfolio beta as a means  to mitigate risk so that they don't fall prey to  

some of the shortcomings that people like Cathy  Wood fell victim to and the way this can be done  

is by constructing a well-diversified portfolio  which comprises of high beta low beta neutral  

beta stocks so that depending on how economic  conditions evolve over time you could shift  

the weighting of these different beta groups in  order to achieve a more defensive more aggressive  

or market neutral positioning depending on the  circumstances if you look at investors like  

Warren Buffett these types of investors have  a well-diversified portfolio comprising of low  

beta and high beta stocks which allows them to  adapt to different market conditions and if you  

follow a similar strategy you'll be able to reduce  your risk in the market as well so to recap how we  

calculated the portfolio data all we did was  determine the total value of the portfolio we  

then proceeded to determine the market weight of  each of the equity holdings within that portfolio  

and we multiplied those market weights by the  respective beta in order to find the weighted  

average beta measure of the portfolio now some  of you may be wondering how do I find beta or  

how do I calculate beta there are a variety of  financial resources out there whether it's CNBC  

Bloomberg yahoo finance trading view which  offer beta measures free of charge however  

there's also a way of calculating beta on  your own which is something that I'm going  

to be sharing with you guys in a future video of  mine so stay tuned for that video if you want to  

keep up to date with my videos make sure to hit  that notification bell make sure to subscribe so  

that you don't miss out on my new videos as they  get released with that my name is k=Kevin Biroun  

and as always I wish you guys a great day and  I'll catch you guys on the next video see ya you