Beta-weighting standardizes position or portfolio risk to a single standard, to compare sensitivity to a benchmark like the S&P 500
Stress testing is a way of looking at performance simulations under different market conditions
Learn about new analysis tools available on the TD Ameritrade Mobile Trader app
Managing a portfolio in today’s market can be a complicated task, especially if the portfolio consists of different assets and multiple positions. And these days, when volatility makes its presence known—sometimes in the blink of an eye—immediate access is key.
Need portfolio analysis anytime and anywhere? Now you can get it with the TD Ameritrade Mobile Trader app.
Can’t Stress This Enough
The elements comprising your portfolio may exhibit radically diverse characteristics, different “personalities” under market stress, and incongruously divergent levels of volatility. We’re not just talking proverbial apples and oranges here; depending on the size of your portfolio, it could be an aggressively disharmonious medley of fruit, plus a few exotic ones thrown into the mix. Now, wouldn’t it be nice to distill all this complexity into one essential unit, one standard of measure—say, reducing this entire fruit medley into something like sugar content or total carbs?
Well, there is one approach, and it’s called “beta-weighting.” Beta-weighting lets you assess all your positions against one standard, and it focuses on one essential characteristic underlying all assets: volatility. Volatility also happens to be a factor that stresses out many investors. But what if you could get a visual handle on volatility? What if you were able to tinker with it under different test scenarios? Perhaps you might be able to transfer some of that stress over to your portfolio, running it through a few stress tests, and analyzing how it might respond. If anything, you might make clearer portfolio strategy decisions, which ultimately, can take a great deal of stress off your shoulders.
Hold On—Beta What-ing?
Beta measures the volatility of an individual asset or an entire portfolio in comparison to a benchmark, say, the S&P 500. Beta can help assess your portfolio’s systemic risk, which refers to risk borne by the market as a whole. In other words, beta-weighting can be an integral part of pursuing your financial goals.
Beta-weighting is about taking all of your positions—stocks, ETFs, and options—and converting them into one standard unit. As in the analogy above, it’s like taking an entire regime of fruit—apples, oranges, berries, etc.—and reducing them to an essence like total sugar or total carbs. That way, you can better understand how your portfolio, as a single metric, might move or change in relation to a benchmark or the broader market. Simply put, beta-weighting can help you think like a trader, but act like an investor.
Figure 1 shows beta-weighting in action. It takes a portfolio of stocks and options and normalizes its P/L to changes in the S&P 500 Index (SPX).
FIGURE 1: BETA-WEIGHTING ON TD AMERITRADE MOBILE. The beta-weighting tool standardizes all positions to a single standard: the price change in the S&P 500 Index (SPX). Image source: TD Ameritrade Mobile app. For illustrative purposes only.
Beta-weighting can provide you with important information on your portfolio’s size, diversity, and general risk as a single unit relative to your benchmark. In this regard, it can be a key component of portfolio risk management. Beta-weighting can be particularly valuable during periods of volatility. But it can be a complex topic. If you’re new to the concept, you can start by watching a beta-weighting video at the thinkorswim Learning Center.
Stress Testing Your Portfolio
A stress test is a simulation designed to analyze how an asset or portfolio might perform under conditions of volatility, market declines, or a general economic crisis. No one can predict the depth or breadth of an unfavorable market scenario, nor the outcome of holding a specific mix of assets during such a period. But running simulations may help you strategically design a portfolio that might withstand certain levels of market stress (hence, the term “stress test”).
Stress testing and beta-weighting your portfolio may sound like a rather laborious task involving lots of mathematical calculations. And it was—before the advent of modern trading and investing tools and apps.
TD Ameritrade clients already had the ability beta-weight and stress-test positions via the thinkorswim® platform. Today, the power to analyze potential profit and risk is available on the TD Ameritrade Mobile Trader app as well. Users of Apple products can download via the App Store. The Android app is available on Google Play.
Finally, if you’re looking for real-time ideas to help you manage your portfolio, consider tuning into the TD Ameritrade Network.
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TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc., member FINRA/SIPC are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.