Beta Weighting

Beta is a measurement of risk for an asset relative. Beta-weighting is a portfolio management tool that allows an investor to evaluate their portfolio to a benchmark.
On this page

Beta-weighting is a portfolio management tool that allows an investor to evaluate their portfolio against a specific stock or market index to determine how the portfolio’s assets will respond to volatility.

A positive beta means a stock or portfolio will generally move in the same direction as the benchmark. A negative beta implies that the assets will move in the opposite direction of the beta-weighted benchmark.

Beta-weighting helps distribute risk to keep a portfolio neutral and balanced against directional moves and highlights how the overall portfolio and the individual assets within will gain or lose money. If a portfolio begins to skew bullish or bearish relative to its benchmark, it can be useful to beta-weight the assets to determine how to re-balance the allocation to tilt the account in the desired direction.

For example, suppose an investor wanted to have multiple assets perform comparably to the S&P 500. In that case, they could beta-weight the portfolio against SPY to ensure that volatility and price changes in the overall broad market would have a similar impact on their account.

As the volatility of the individual assets in the portfolio change over time, the beta of the account would change. The portfolio could be re-balanced to achieve a beta of 1 relative to the benchmark index.

Get new updates to the Handbook
Be the first to get notified when we publish new updates or expand the Handbook.
Was this helpful?

FAQs

How is weighted beta calculated?

Beta-weighting is a portfolio management tool that allows an investor to evaluate their portfolio against a specific stock or market index to determine how the portfolio’s assets will respond to volatility.

For example, if an investor wanted to have multiple assets perform comparably to the S&P 500, they could beta-weight the portfolio against SPY to ensure that volatility and price changes in the overall broad market would have a similar impact on their account.

To calculate the portfolio’s beta, multiply the beta of each individual stock within the portfolio by its percentage value of the portfolio, and add all the sums. A positive beta means a stock or portfolio will generally move in the same direction as the benchmark. A negative beta implies that the assets will move in the opposite direction of the beta-weighted benchmark.

Beta-weighting helps distribute risk to keep a portfolio neutral and balanced against directional moves and highlights how the overall portfolio and the individual assets within will gain or lose money.

What is the beta of a risk-free asset?

A risk-free asset would have a beta of zero. A zero beta implies that the security has no systematic market risk. 

What is beta-weighted Delta?

Beta-weighting is a portfolio management tool that allows an investor to evaluate their portfolio against a specific stock or market index to determine how the portfolio’s assets will respond to volatility. Investors can use delta to balance the portfolio.

For example, if a portfolio consisted of one position with a positive delta of .50, a new position could be added with a negative delta of -.50 to create a delta neutral portfolio.

Trade smarter with automation