Extended Viewer

Practical Applications from the Experts - November 2009

categories: Product Documentation, general

Enhancements to Beta Calculation

RiskMetrics has recently released enhancements to the beta statistics that are aimed at giving users more flexibility in defining them. The notable enhancements are:

  • Choice of denominator type in the calculation of beta
  • Dollar Beta statistic
  • Using Absolute Denominator type to calculate beta

The examples below illustrate the applications of these enhancements

 

Portfolio of futures

Traditional methods of calculating beta as a % of present value (PV) would result in exaggerated values for unfunded positions such as futures which have a small PV compared to their exposure. The latest enhancements provide the user with a choice of denominator types (Notional, underlying PV, RiskAttribution PV and present value) as shown below. This helps in providing comprehensive beta numbers for a futures position.

 

Long/Short Portfolio

The latest enhancement provides a meaningful way to estimate the beta of a long short portfolio with the addition of the Dollar Beta calculation. Users can choose the Beta Type to be Dollar Beta as shown below.

As seen above traditional beta for this portfolio is inflated due to the low present value of the portfolio. Using the dollar beta instead gives a measure of the beta adjusted exposure that is more meaningful for Long/Short portfolios.

 

Portfolio of Short Positions

Users can now get beta expressed as a % of the absolute PV of a position. The traditional definition a short position in AAPL would result in a positive beta value since this was expressed as a % of PV. With the new absolute PV option the beta of this short position will be negative as expected.


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