# Portfolio Ratios

#### Portfolio PE

PE ratio of a company is the ratio of the share price of a company to its earnings per share. PE ratio allows one to infer how much investors are willing to pay for one Rupee of the company’s profit. More about the ratio can be read here.

Portfolio’s can also have PE ratio. Total net worth is the price of the portfolio or the numerator part of the PE ratio. Cumulative earnings of all the companies is the denominator part. You can read more about company’s financial statements and earnings here.

Stock | Number of shares held (A) | Current Price (B) | Net Worth (C = A * B) | Earnings Per Share (D) | Total Earnings (E = D * A) |
---|---|---|---|---|---|

SBI | 33 | 158.8 | 5,238.80 | 23.50 | 774.20 |

PNB | 122 | 71.0 | 8,662.00 | 18.00 | 2,198.40 |

BOB | 53 | 131.9 | 6,990.70 | 17.30 | 918.50 |

BOI | 85 | 83.30 | 7,080.50 | 26.30 | 2,232.10 |

ALBK | 584 | 43.40 | 25,316.40 | 11.10 | 6,453.20 |

Total | 53,288.40 | 12,576.40 |
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PE Ratio | PE = C / D | 4.2 |

One way of interpreting a portfolio PE is by comparing the same with the benchmark PE.

If a portfolio PE is higher than the benchmark PE, then one can interpret the portfolio as being overvalued when compared to the benchmark

One can also compare the current PE of the portfolio with its historical value to understand whether the portfolio is undervalued or overvalued.

If a portfolio has more companies growing at a fast pace, then PE ratio of the portfolio can be high as these companies usually are expensive compared to the rest of the market. If the portfolio companies have had weak total earnings, the total PE ratio could be inflated because of low denominator. Hence one has to closely inspect the portfolio companies before drawing any conclusion about portfolio PE ratio.

#### Portfolio Dividend Yield

A stock’s dividend yield measures its annual dividends as a percentage of its price. More about the ratio can be read here.

A portfolio’s dividend yield represents the total annual dividend income from the portfolio as a percentage of the current net worth of the portfolio

A high dividend yield number is good as it indicates that the investor received more dividends from the companies in his / her portfolio.

So how does one know whether the dividend yield he / she has earned is high or low? Obviously either by comparing the portfolio dividend yield with the benchmark dividend yield or by comparing the current dividend yield of the portfolio with its’ historical numbers.

However one has to be careful before drawing broad conclusions about the dividend yield of a portfolio. A portfolio might earn low dividends due to a number of reasons. Companies growing at a fast pace conserve cash and do not pay out dividends. Companies making losses continuously might also not have spare cash to pay dividends. If the investor’s portfolio has a lot of fast growing companies or a lot of loss making entities, dividend yield will be low. However the first case is good for the investor because share prices of fast growing companies also grow fast, thereby earning good return on investment. Low dividend yield because the portfolio has a lot of loss making companies will affect the investor 2 ways. He/ she does not earn dividend income and at the same time company’s share prices might also drop resulting in loss on investment.

Hence investor should understand the portfolio companies better before interpreting the dividend yield number.

#### Portfolio Beta

Beta is a measure of market risk. If the beta of a stock is more than 1, it means stock moves along with the market in the same direction and is more volatile than the market. If the beta is less than 1, it means that stock is less volatile and not related to the market. Read more about beta here.

Similar to stock beta, a portfolio beta represents the volatility of the portfolio. In one of the earlier chapters we understood the benefit of diversification and how it allows us to protect ourselves against company/sector specific risk. However market risk – risk that is not specific to any single company and affects all the companies in the market – is not diversifiable. **A portfolio beta represents market risk**.

Portfolio beta helps us understand the direction of the portfolio movement and the strength of the portfolio movement in comparison to the market

If the beta of the portfolio is more than 1, it means that the portfolio moves in the same direction as the market and at a faster pace than the market. Similarly if beta is less than 1 it means portfolio does not move in tandem with the market. So let’s assume imaginary portfolio X has a beta of 1.3. Suppose the market is expected to increase by 1% on a particular day, portfolio X can be expected to increase by 1.3% (1% * 1.3). Similarly if imaginary portfolio Y has a beta of -0.8, then on a day market is expected to increase by 1%, portfolio Y can be expected to decrease by 0.8% (1% * -0.8).

**Portfolio beta is the weighted average beta’s of the individual stocks of the portfolio**. Proportion of company’s weight in the portfolio can be used as the weight when calculating portfolio beta. So portfolio beta can be altered by changing stocks in the portfolio. If the investor expects the market to go up over the next 1 year, then he can add high beta companies to his portfolio to enhance portfolio returns. On the contrary if the markets are expected to drop over the next 1 year, the investor can load up his portfolio with low/ negative beta stocks thereby protecting portfolio returns.