This worksheet demonstrates how to calculate a portfolio beta and

how margin affects the beta. Assume that we are investing in four
stocks (Microsoft, IBM, Intel, and Motorola). We have 25% of
our funds in each stock and the portfolio is rebalanced monthly to
keep the weights the same. First, we have the monthly closing
prices of the stocks.

Date SP500 MSFT IBM INTC MOT

8/10/1995 561.880 46.250 103.375 61.375 74.625
9/1/1995 584.410 45.250 94.500 60.125 76.375
10/2/1995 581.500 50.000 97.250 69.875 65.750
11/1/1995 605.370 43.563 96.625 60.875 61.500
12/1/1995 615.930 43.875 91.375 56.750 57.000
1/2/1996 636.020 46.250 108.500 55.234 54.000
2/1/1996 640.430 49.344 122.625 58.813 54.250
3/1/1996 645.500 51.563 111.250 56.875 53.000
4/1/1996 654.170 56.625 107.750 67.750 61.250
5/1/1996 669.120 59.375 106.750 75.500 66.750
6/3/1996 670.630 60.063 99.000 73.438 62.750
7/1/1996 639.950 58.938 107.500 75.125 54.000
8/1/1996 651.990 61.250 114.375 79.813 53.375
9/3/1996 687.330 65.938 124.500 95.438 51.500
10/1/1996 705.270 68.625 129.000 109.875 46.000
11/1/1996 757.020 78.438 159.375 126.875 55.375
12/2/1996 740.740 82.625 151.500 130.938 61.250
1/2/1997 786.160 102.000 156.875 162.250 68.250
2/3/1997 780.150 97.125 146.000 153.125 66.375

Now, we calculate the returns and betas for each stock and for three different portfolios. The
portfolios vary by the amount of borrowed funds. The 0% portfolio uses only your own funds.
The 50% portfolio uses all of your own funds plus 50% borrowed. The 100% portfolio uses all of
your own funds plus the same amount borrowed (this is the legal limit). Notice that the portfolio
beta increases by the same percentage as the amount of borrowed funds (i.e., when you borrow
50% of your equity, the beta increases by 50%).

The next worksheet shows the result grahically.

Portfolios
Date SP500 MSFT IBM INTC MOT 0% 50% 100%
Aug-95 4.01% -2.16% -8.59% -2.04% 2.35% -2.61% -3.91% -5.22%
Sep-95 -0.50% 10.50% 2.91% 16.22% -13.91% 3.93% 5.89% 7.86%
Oct-95 4.10% -12.88% -0.64% -12.88% -6.46% -8.22% -12.32% -16.43%
Nov-95 1.74% 0.72% -5.43% -6.78% -7.32% -4.70% -7.05% -9.40%
Dec-95 3.26% 5.41% 18.74% -2.67% -5.26% 4.06% 6.08% 8.11%
Jan-96 0.69% 6.69% 13.02% 6.48% 0.46% 6.66% 9.99% 13.32%
Feb-96 0.79% 4.50% -9.28% -3.29% -2.30% -2.59% -3.89% -5.19%
Mar-96 1.34% 9.82% -3.15% 19.12% 15.57% 10.34% 15.51% 20.68%
Apr-96 2.29% 4.86% -0.93% 11.44% 8.98% 6.09% 9.13% 12.17%
May-96 0.23% 1.16% -7.26% -2.73% -5.99% -3.71% -5.56% -7.41%
Jun-96 -4.57% -1.87% 8.59% 2.30% -13.94% -1.23% -1.85% -2.47%
Jul-96 1.88% 3.92% 6.40% 6.24% -1.16% 3.85% 5.78% 7.70%
Aug-96 5.42% 7.65% 8.85% 19.58% -3.51% 8.14% 12.21% 16.28%
Sep-96 2.61% 4.08% 3.61% 15.13% -10.68% 3.03% 4.55% 6.07%
Oct-96 7.34% 14.30% 23.55% 15.47% 20.38% 18.42% 27.64% 36.85%
Nov-96 -2.15% 5.34% -4.94% 3.20% 10.61% 3.55% 5.33% 7.10%
Dec-96 6.13% 23.45% 3.55% 23.91% 11.43% 15.58% 23.38% 31.17%
Jan-97 -0.76% -4.78% -6.93% -5.62% -2.75% -5.02% -7.53% -10.04%
Beta 1.00 0.96 1.13 1.17 1.47 1.18 1.77 2.36
 Portfolio Returns with Leverage

Portfolio Returns with Varying Amounts of Leverage

40.00%

30.00%

20.00%

No Leverage
10.00% 50% Margined
Fully Margined
Return

0.00%

-10.00%

-20.00%
5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 7
-9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9 -9
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A Se O N D Fe M A M Ju A Se O N D

Date

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