Author: Michael Arold
Covestor model: Technical Swing
Disclosures: None
I often see other investors posting their their cash levels on social platforms such as StockTwits. I have to admit I have also done this in the past. However, I would argue that these numbers are irrelevant and don’t say anything about the bullishness or bearishness of the trader. It is almost like discussing averages which are irrelevant without mentioning the standard deviation of the distribution, but that might be a topic for another post.
Swing traders usually hold a couple of positions and portfolio beta quantifies the overall risk. A trader can be 50% in cash but the portfolio might still show fluctuations similar to the S&P 500 if the positions are high-beta stocks, such as Lululemon Athletica inc. (NASDAQ: LULU) for example. Or a trader can be 100% invested and portfolio beta is 0 because long and short positions are balanced. I frequently calculate the beta of my swing trading portfolio and balance it with my market expectations.
Another application of portfolio beta is identification of individual position risk. If the relative beta of a position is significantly higher than the average value, overall portfolio performance can be overly sensitive to the performance of that position. By replacing the high-beta contributor with a short position, overall beta can be reduced significantly if needed.
Source:
“Beta (finance)” Wikipedia. https://en.wikipedia.org/wiki/Beta_%28finance%29
