Calculating the volatility, or beta, of your stock portfolio is probably easier than you think. A beta of 1 means that a portfolio's volatility matches up exactly with the markets. A higher beta indicates great volatility, and a lower beta indicates less volatility. To do it, you'll need to know the percentage of your portfolio by individual stock and the beta for each of those stocks.

You can learn to calculate beta for individual stocks by clicking here.

The calculation
The first step is to multiply the percentage of your portfolio and the beta for each individual stock. Once that is done, simply add up the results and you'll have your portfolio beta.

This method is a simple weighted average calculation. It's an easy way to quickly assess your entire portfolio's volatility. It only works though if the individual stock's betas are calculated correctly and comparably. Using a six month time period to calculate one stocks beta and a six year period to calculate the other will give you a much different result than using the same time period across the board. Likewise, it's wise to use the same index for each individual stock's beta so that your portfolio beta will have consistency with that index as well. For most portfolios, the S&P 500 is a reasonable index to start with.

It's not required to use the same time period and index for each stock, but it is important to understand how differences in each individual stock's beta will impact the result for your entire portfolio.

Perhaps you own some stocks with a very long-term investment horizon -- say five or ten years -- while another group of stocks are short-term investments. In that case, you may find some value in calculating each stock's beta based on your anticipated holding period. The result will be quite different than using a constant time frame for every stock, so if you choose to go this alternative route, make sure you recognize the differences and how it impacts the math.

A longer time period will mute the effects of shorter term market volatility, just like using a more volatile index will make a stock appear less volatile that if it were compared to a more stable index. You must understand your inputs in order to understand the formula's outputs.

A simple example
Let's assume that you own three stocks. Stock A has a 0.35 beta and represents 50% of your portfolio. Stock B has a bet of 0.98 and is 30% of your portfolio. Stock C has a 0.66 beta and is 20% of your portfolio.

First, we'll multiple each individual stock's beta with the percentage in the portfolio.

Beta

Percentage of Portfolio

Beta times % of Portfolio

Stock A

0.35

50%

0.175

Stock B

0.98

30%

0.294

Stock C

0.66

20%

0.132

Next, we simply add up the last column to determine our portfolio's beta. In this case, that sum and this example portfolio's beta is 0.60.

Understand the math first, then interpret the results
The key to using this technique is understanding how each number is actually calculated. Using the weighted averages method, the stocks you own the most of will have the largest influence on your portfolio's beta. That intuitively should make sense. In a similar way, any stock with a particularly large or small beta individually will also pull your portfolio's overall number in that given direction.

Likewise, calculating each individual stock's beta consistently is important so that you are comparing apples to apples. If you choose to calculate them with different time periods or compared to different indices, that's fine. Just make sure you understand how that change will affect the resulting math and how that changes the interpretation of your portfolio's overall beta.

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