MAFA/SFM

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Querist : Anonymous

Querist : Anonymous (Querist)

02 December 2010 Security Weightage Beta Portfolio Beta
A 0.50 0.80 .50*.80
B 0.25 1.25 .25*1.25
C 0.25 0.95 .25*.95

My query is y are using weighted avg for each security can any one xplain backgroud behind using weighted avg for portfolio beta pls experts

CA Dhiraj Ramchandani

CA Dhiraj Ramchandani (Expert)

03 December 2010 Hi.., in simple terms, Beta is considered as a factor representing change in the return of security directly related to change in the market... For example, if B=0.7%., that means, wid every 1% change in market (whether up or down), return on security too will change in same direction by 0.7%...... A portfolio consists various securities, that means, portfolio return is consisted of such individual security returns... Now, equal wieghts cannot b allotted as amount invested in each security is different.., on such investments based, weights r allotted.... Thus, while calculating portfolio beta, we calculate weighted average to avoid miscalculations....

CA Dhiraj Ramchandani

CA Dhiraj Ramchandani (Expert)

03 December 2010 Lets take an example.., in figures u gave, as per weightage avverage, we get portfolio beta as 0.95.... But if v dnt take weightage avg., rather we consider as simple average, we get portfolio beta as 1, which is not correct..... I wud suggest u to take practical example of investing rs 2000 in A, 1000 in B and 1000 in C.... An solve this problem by both methods, i.e simple average and weightage average....

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