# Effective Beta

I came across this while doing a practice exam. Effective Beta = return on hedge portfolio / return on the market. Didn’t recall this formula in the readings. Wondering if you folks already knew about it. It caught me off guard.

i think i saw it somewhere, but it is such a simple concept i didnt pay attention to it

Calculated the return from your portfolio, then caculate the return from your hedging position, add them up. Then divide that to your market return. Compare that beta to the beta you are trying to achieve. On Mock exam, there was a reverse-engeering problem, asking you if the hedging was effective. The math was exactly what you described here.

If I wanted a Beta of 1.2 and I hedged my equity so that my return was 3.5% and the market was 2.97%, my effective Beta is 3.5/2.97 = 1.18. Which is close to my target beta of 1.2.

ya, i recall this - the CFAI texts had a nice example of seeing if your hedge was effective or not in achieving your desired target beta… i’d love ot see a q like this on the exam.

thanks for a reminder guys, I’ve seen it on one of the sample exams…