MAFA/SFM

This query is : Resolved

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)
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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)
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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....