How does Beta work?

Beta (β) indicates how sensitive your portfolio is to a specific index. Beta is expressed as a value, which indicates whether your portfolio return (on a daily basis) reacts more or less strongly to an index change.

• Beta of 1: This means that your portfolio almost follows the index. If the index rises 1%, your portfolio will rise about 1%. If the index falls 1%, your portfolio will fall about 1%.
• Beta higher than 1: This means that your portfolio will react more strongly when the index changes. With a Beta of 1.5; and an index increase of 10%, your portfolio will theoretically rise by 15%. But if the index falls 10%, your portfolio can also fall harder by 15%. Securities that are sensitive to economic cycles or react strongly to market changes often have a Beta higher than 1.
• Beta between 0 and 1: This means that your portfolio will react less strongly when the index changes. With a Beta of 0.5; and an index increase of 10%, your portfolio will theoretically increase by 5%. But if the index decreases by 10%, your portfolio will decrease less strongly by 5%. Bonds and defensive ETFs often have a Beta between 0 and 1.

In addition to positive Beta, 0 and negative Beta are also possible;

• Beta of 0: This means that your portfolio does not follow the index. There is then no correlation between how your portfolio and the index.
• Beta below 0 (negative): This means that your portfolio reacts in the opposite direction of the index. If the index rises, your portfolio will fall and vice versa. A well-known example is gold during the financial crisis of 2008 when gold was seen as a safe haven and therefore moved in the opposite direction than the market. Gold had a negative Beta at that time.

Beta in PDT

An index is often used to measure market changes. For example, within Portfolio Dividend Tracker we use the MSCI All World* as standard, as it covers a broad stock market. When you use the benchmark functionality, you can also choose to measure the Beta using the S&P 500 or AEX. You can also view the Beta over a selected period, for example one (specific) year or year-to-date.

How is Beta calculated?

The Beta of your portfolio is calculated by looking at how often the returns of your portfolio and the index rise or fall at the same time and how much they move compared to each other. The underlying calculation is quite mathematical and uses the variance and covariance of your portfolio and the index.

* We currently use the iShares MSCI ACWI UCITS ETF (EUR, Acc) instead of the MSCI All World index due to licensing agreements. In the future, we plan to switch to the MSCI All World index.