What is Portfolio Beta used to assess?

Portfolio Beta is a crucial measure used to assess the market risk of a diversified portfolio. It calculates the sensitivity of the portfolio's returns in relation to the overall market returns, typically represented by a benchmark index. By evaluating the Portfolio Beta, investors can understand how much the portfolio is likely to move in relation to movements in the market. A beta greater than one indicates that the portfolio is more volatile than the market, while a beta less than one shows that it is less volatile.

This measure is especially important for diversification because, while individual securities may have unique risk profiles, the overall risk of a diversified portfolio is often more concerned with its relationship to the market as a whole. This helps investors make informed decisions on asset allocation and risk management.

Understanding this concept helps in determining how much market exposure a portfolio has, thereby enabling the creation of investment strategies that align with the investor's risk tolerance and investment objectives.