This portfolio beta template is used to determine the weighted average beta of the stocks in your stock portfolio. Beta (β) is a measure of volatility relative to the market. It is an important metric to consider when evaluating how an investor's portfolio reacts to market trends and shocks.

Reacting to Financial Markets

Beta (β) measures how volatile a stock's returns are, relative to the overall market. By looking at beta, financial analysts have a way to connect a stock's performance to the market's performance. For example, a company with a high beta is generally seen as riskier, with higher returns since it responds to the market more strongly. In contrast, a company with a low beta responds less to movements in the market. Beta can be evaluated with the following criteria:
  • β > 1: moves the same direction as the market, but with larger movements
  • β = 1: moves the same direction as the market, exactly as much as the market
  • 0 < β < 1: moves the same direction as the market, but with smaller movements
  • β = 0: doesn't move with the market at all, completely uncorrelated
  • B < 0: moves opposite to the market
As an example, many technology start-ups can be seen to be highly risky, with high betas. Looking at a firm with a beta of 2, this would imply that the firm's return would on average change significantly more than the market changes. Make sure to use CFI's portfolio beta template to see what the cumulative beta of your portfolio is! Beta is also an important part of the Capital Asset Pricing Model (CAPM). This model is used to figure out the expected return on a security. Thus, the formula for the CAPM is: Ra = Rrf + Ba*(Rm - Rrf) Where:
  • Ra = Expected return of the security
  • Rrf = Risk-free rate
  • Ba = Beta (β) of the asset
  • Rm = Expected return of the asset
As seen in the formula, beta is a multiplier against the market risk premium (Rm - Rrf). Thus, by looking at the CAPM, we can see that a higher beta would mean higher returns if the market also did well. Check out CFI's Math for Corporate Finance course to learn more about concepts like CAPM!  
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