What is the "Beta" of a portfolio?

Beta is a term used to measure the correlation of volatility of a portfolio against the index in which it resides. The market has a Beta of 1 since it IS the market. Your portfolio would be more volatile than the market if it had a Beta higher than 1. Conversely, if your portfolio had a Beta of less than 1, it means that you have less volatility than the market.

ChasingTheMarketsOrRisk.jpgAs an example, let’s say that you owned 20 stocks found in the S&P 500 and that the index (the S&P 500) returned 10% over the last 5 years. If your portfolio returned 10% but had a Beta of 0.5 than your portfolio (from a risk versus return point of view) was better than holding the index. This is because your portfolio had HALF the volatility of the index, yet produced similar returns.

Beta is useful information (and widely available information) when looking at mutual funds. If you see a mutual fund that has the same 10 year return as the market but the Beta is 1 or higher, is it worth owning? If you can find a fund that matches or exceeds market performance with a Beta below 1, than that would be a much better choice since your risk-adjusted returns would be higher – or in other words, you are getting all the returns, with less volatility!

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Nora

    Awesome post! Funds with betas of less than 1 are few and far between, but great finds nonetheless! Is Beta information common information on fund profiles? Where would people find that info?

  • Preet

    Excellent questions Nora – and here are the correspondingly excellent answers ;)

    In Canada, one of the better ways to look up fund Betas is to use Globefund. Specifically you would want to look up a "fund profile". It basically covers the universe of mutual funds in Canada.

    Here is a link to a fund profile for AIC Advantage Fund. You can see it’s 3 year Beta is 0.8. Note that the average fund in it’s group has a Beta of 0.76 – and remember a lower Beta means lower volatility.

    In the states you can look up Betas for over 17,000 funds using Morningstar. (Morningstar is also available in Canada). When you look up a fund snapshot, click on the navigation menu on the left under "Risk Measures" and you will find the Beta information. Click here to see a sample Beta reading for a US Mutual Fund.

  • Hollie

    THANK YOU SO MUCH!