3) Multiply the beta of each security with the decimals (of percentage of
investment of a security)4) Add the result on each security as obtained in step-3. the total will be the beta
of the portfolio.The financial experts will do the beta analysis. As individuals we may find it difficult to
do the beta analysis i.e., the effect on one variable (return on a security) because change
in other variable (market return). The financial experts, depending on the price
situations, calculate the beta estimation on daily, weekly or monthly returns. They may
use shorter periods or longer periods to estimate the beta. They will give the reason for
using the specific length of period. While doing beta estimations, the exceptional price
movements need to be ignored.
Design
The investment portion may contain many asset classes, such as, equities, bonds, bullion.
PSU bonds, cash and money market instruments. Portfolio may contain cash also and
sometimes they may contain high liquid securities to enable the portfolio manager to
have flexibility in the transactions regarding buying and selling of scrips. This will
enable him get over the problem of balancing sales to purchases on day-to-day basis.
Some of the portfolio holders may hold a higher portion of bonds when compared to
shares from the point of view of stable source of income and when compared to
variations in the fortunes on shares.
The analysis which has been dealt so far will help us decide the allocation of funds to
invest in equities, bonds and money market instruments. The investment in equities will
depend on risk and return and on the beta factor. The risk on bond depends on changes in
interest rate. Such risk will be measured by duration. The default risk is also associated
with in case of individual bonds. However, since the beta sensitivity of bonds and money
market securities is extremely less, its risk factor in portfolio may ignore. Now the focus
in portfolio will only be on the equity. Therefore, the beta of every share, if added, will
be equal to the beta of total portfolio.
The shareholders are the real owners of the company. In case the company is to be
wound up, the share holders will be the last persons to get the money, if any. Therefore,
share equity is longest source and duration asset in the capital market. The change in the
interest rate may also affect the share price through PE ratio. It may alter the portfolio
structure more in favor of bonds when compared to the equity scrips.
Fluctuations in the stock market index show how the value of each portfolio will behave,
if such portfolio had a beta of one. Based on this an investor may choose a beta below
one or very near to one, but below one or equal to one or to be aggressive investor i.e., by
taking more risk, beta more than one. The stock market index will normally be, for 10
years. The return and risk varies directly. The baseline of zero risk security will be taken