Beta is also known as the volatility or the overall movement of a particular stock. Beta is calculated with the comparison to the benchmark index, in this case, to know how much a particular stock is volatile, compared to the NIfty as a whole. The Beta of a portfolio is calculated by calculating the Beta of every individual stock in the portfolio and adding the Weighted beta of every stock to get the total Beta of the Portfolio.
Beta-
Beta is a number given to a particular stock that denotes how much it has moved in the context of the Benchmark Index (In this case the Nifty).
It can be also termed as the Volatility of a particular stock in comparison with the Nifty. Beta can be also known as the Systematic Risk of any stock compared to the Index as a whole
For example, if the Beta of a stock “X” is 2, then that denoted it is 2 times or 100% more volatile than the Nifty.
Similarly, if a stock goes up & down by more than the Nifty then the Beta of that particular stock will be more than 1 and if it moves less than the Nifty then the Beta will be less than “1”.
To calculate the overall BETA of a portfolio-
To calculate the overall beta of a portfolio one has to find out the Beta values of Individual stocks according to the weightage of individual stocks.
Calculation of the BETA is shown in the table below-
Therefore as calculated the overall Beta of the above portfolio of 4 stocks, the Beta turns out to be 0.836 or 0.84 (rounded to the 2nd decimal place). This means that the overall Beta of this Portfolio is less than that of the Nifty as most of the stocks in this Portfolio are low Beta stocks.
To imply that in numbers, If Nifty moves my 100 points up or down, the value of this portfolio will move by 83.6 Rupees on either side which means that the overall volatility of this Portfolio is less than that of Nifty and the Price swings will also be less than Nifty.
The change in the Beta of any portfolio not only depends upon the Beta of a particular stock but also on the total weightage of the stock in the Portfolio.
For example, as seen in the above portfolio, the overall Beta is less than that of Nifty which is 1, but it consists of 1 stock that has a Beta higher than that of Nifty but as the overall weightage of the Stock in the Portfolio is less, therefore, the overall portfolio turned out to be less than 1.
If we increase the weight-age of Yes Bank in the Portfolio to 0.5 and reduce the weightage of ITC to 0.05 then the overall Beta of the portfolio will change drastically to 0.984 which will increase the overall Beta by 0.15 points.
The Beta of a portfolio plays a major role among Investors as “Low risk-taking” investors choose stocks that have a low Beta (Less than 1) as the overall volatility will be less in such stocks, on the other hand, Investors with “Higher Risk Appetite” choose high Beta stocks (Beta more than 1) which have the potential to outperform the benchmark index (Nifty) in terms of returns but the downside with high Beta stocks is that they tend to fall more in times of an Overall market sell-off. Therefore one should identify their risk profile before choosing Stocks.