Tag Archives: Utility
Posted on 10. Feb, 2012 by Wilensky.
By: Harvey Sax
A lot of that depends on the beta of your portfolio. But before we get into all of that, let’s go over just what beta is.
Stock Beta is a ratio that indicates how a stock fluctuates with relation to the market. Beta is an indicator of market risk also called volatility. When you research a stock, look at the beta to get an idea as to how choppy the returns on this stock will be with relation to the market. If this doesn’t align with your risk tolerance, this stock may not be for you.
Here are some guidelines on stock beta and what this number means
A beta of 1: This means this stock is in line with the market. Market usually refers to the S&P 500 group of stocks
Beta of less than 1: This means market fluctuations affect this stock to a lesser degree (utility stocks)
Beta of more than 1: This means this is a volatile stock (technology stocks)
Negative beta: This means that this stock moves in the opposite direction to the market! If the market’s returns are negative, this stock’s returns will be positive! Gold is usually given as an example even though beta shows that though it is less than 1, it isn’t negative.
Zero beta: This means this stock returns have no relation to the market! Cash in your wallet, lottery are good examples
Remember, beta is calculated with past data and this is not necessarily an indicator of future returns!
Different sites show different betas depending upon what timeline was chosen.
A simple and quick way to find out if you are an aggressive or a conservative investor is to find the weighted average of all stock betas in your portfolio.
STEP 1: Look up the beta of your individual stocks. It’s easily found on Yahoo finance or other popular stock market quotation sites
STEP 2: Find the allocation of each stock in relation to your overall portfolio. For example if your overall portfolio value is $10,000 out of which $5,000 comes from Apple stocks, that’s a 50% allocation for AAPL
STEP 3: Multiply the individual stock beta with the allocation percentage. For example the beta for AAPL is 1.38. 1.38 X 50% = 0.69
STEP 4: Add up all the weighted betas to arrive at your portfolio’s beta