Key takeaways
- Beta measures how strongly your portfolio swings with the overall market.
- A beta of 1 means moving in step with the market, above 1 stronger swings, below 1 more muted ones.
- Talantor calculates it against a broad world index, from weekly returns over up to five years.
What is beta?
Beta describes how sensitive your portfolio is to market movements. It answers: if the market rises or falls by 1%, how much does your portfolio typically move?
- Beta = 1: on average, your portfolio moves like the market.
- Beta above 1: it reacts more strongly - more opportunity, but also more risk.
- Beta below 1: it reacts in a more muted way, so it fluctuates less than the market.
- Beta below 0: it tends to move against the market (rare, for example with hedges).
A beta of 1.2 roughly means: when the market gains 10%, your portfolio gains about 12% on average - and likewise when the market falls.
What Talantor measures against
The market is represented by a broad, globally diversified world index (FTSE All-World), which is the best single representation of a globally diversified portfolio. Your beta therefore always refers to this reference market, not to a single country index.
Why weekly returns over five years
Talantor calculates beta from weekly returns over the last (up to) five years. The reason: US exchanges close several hours after the European reference exchange. With daily returns, a large part of a US move would only show up in the reference index on the following day, which would artificially pull beta towards 0. Looking at weekly returns smooths out this time lag, and five years matches the usual convention for beta.
Beta is not goodness of fit
Beta tells you how strongly your portfolio swings with the market - but not how close that relationship actually is. Whether the market explains your movements well is what correlation tells you.