- share price as of Oct 21, 2021
In this small five stock portfolio, we can see that the total value is $51,410.35. Based on the number of shares held in each stock and dividing it by the total value of the entire portfolio, we can determine what weight it holds.
You can see that we are relatively diversified in market sectors, but a little overweight in AMD and CVS stocks. In reality, your portfolio will likely have more than five holdings, which makes it a bit easier to avoid being too overweight in any one stock.
Once you determine the weights for each stock, you simply multiply each stock’s beta by the percent weight it holds in the portfolio. For example, XOM constitutes 18.3% of the portfolio’s weight and comes with a beta of 1.33; its weighted beta is (18.3%)x(1.33) = 0.243. Once we get all five weighted beta numbers, we add them up to get our total portfolio weighted beta value of approximately 1.14.
The market’s beta is set at 1.0 so our hypothetical portfolio is a little more volatile than the average index. But let’s take a closer look at our largest holding, AMD, which also happens to be our most volatile holding based on its beta of 2.01. What if we replaced AMD with another tech stock, such as NVDA, which has a much lower beta of 1.40? Assuming the total value is the same as before, that single stock switch-up changes our weighted portfolio beta to exactly 1.0. Our portfolio is now aligned with market volatility expectations.
Using this technique, we can raise or lower our portfolio’s beta simply by swapping out individual stock holdings for a similar one in the same sector to customize your risk exposure.
Make sure to check our Dividend Screener to make sure you are picking the right security for your portfolio. You can also select securities that are rated high on our proprietary Dividend.com Rating system.