Using Beta in Position Sizing
A $10,000 position in a high-beta stock carries far more market risk than $10,000 in a low-beta stock. Here is how to use beta to size positions and understand your portfolio’s true market exposure.
Beta-adjusted exposure
Multiply a position’s size by its beta to estimate its market exposure. $10,000 in a stock with a beta of 3 behaves roughly like $30,000 of the market. $10,000 in a stock with a beta of 0.7 behaves more like $7,000. If the market drops 10%, the first position might drop about $3,000 and the second about $700, on average.
| Position | Beta | Market exposure | If market falls 10% |
|---|---|---|---|
| $10,000 | 3.0 | $30,000 | About −$3,000 |
| $10,000 | 1.0 | $10,000 | About −$1,000 |
| $10,000 | 0.7 | $7,000 | About −$700 |
Hypothetical example; real moves vary widely.
Unlock all of Investing School
The rest of this lesson, its chart examples and quiz are part of Investing School. Start free with Stock Market Fundamentals and the first lesson in every category.