Key Concepts 4. Portfolio Management

Beta Weight

Beta weighting is a means for investors to put all of their positions into one standard unit. It is a way to look at an entire portfolio and understand how it will change with a move in the market. It tells us about the size, diversity and general risk of our positions.

Beta weighting is calculated using the past five years of data because a realm of different market environments are needed to give accurate values. At tastytrade, we will often beta weight to the SPY because we mostly trade liquid mid to big cap stocks that are correlated with the S&P 500. On the other hand, if most of our positions were in stocks that correlate with a specific sector, such as technology, we might want to beta weight our portfolio to a more appropriate underlying such as QQQ instead.

At tastytrade we beta weight to make sure that our strategies are not too dependent on the directional move of the market. Sometimes, we will have to take certain positions out of our beta weighted portfolio because they throw off the accuracy of the overall value. Beta weighting is not a concrete number that we use to make calculations, but rather a tool that helps us put context around our overall market position.

Beta Weight Videos