beta analysis

7/31/2019 Beta Analysis

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BY- Devendra Kumar Dubey


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AGENDA INTRODUCTION

INTERPRETING BETA

APPLICATION OF BETA

ADVANTAGES

LIMITATIONS


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Introduction Beta measures a stock's volatility The degree to which its price fluctuates in relation to the

overall market.

Gives a sense of the stock's market risk compared to the

wider market. Beta is used also to compare a stock's market risk to that

of other stocks.

Investment analysts use the Greek letter '' to represent

beta.


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TYPES OF BETA NEGATIVE BETA

BETA OF ZERO

BETA BETWEEN ZERO AND ONE

BETA EQUAL TO ONE

BETA GREATER THAN ONE

BETA GREATER THAN 100


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Types of Stock AGGRESSIVE STOCK

Beta of more than 1 indicates an aggressive stock and thevalue of fund is likely to rise or fall more than the benchmark.

beta > 1, more risky than the market.

DEFENSIVE STOCK Beta of less than 1 indicates that the stock will react less than

the market index. beta < 1, indicates less risky than the market.

NEUTRAL STOCK If the beta of a stock is 1 it is called neutral stock. Beta = 1, same risk as the market. This is also called average stock


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of Nifty scripsNAME BETAPHARMACEUTICALS

Cipla ltd 0.45

Ranbaxy lab 0.52

Dr Reddys 0.57

Glaxo Pharma 0.22

IT SECTOR

Infosys technology 1.51

Wipro ltd 1.77

HCL Tech 1.61

Satyam 1.91

FMCG

Britannia 0.19

Colgate-Palmolive 0.28

Dabur 0.70

HLL 0.92

ITC 0.56

NAME BETA

AUTOMOBILES

Bajaj Auto 0.40

Hero Honda 0.80

M & M 1.23

TELECOM

MTNL 0.66

VSNL 0.68

BANKING

HDFC BANK 0.47

ICICI 0.75

OBC 1.26

SBI 0.91


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Beta of a Portfolio Beta of a portfolio can be calculated in terms of the betas of

the individual assets (stocks) in the portfolio If a portfolio contains n assets with the weights w1,

w2,wn. The rate of return of the portfolio is r = w r

Implying = w The portfolio beta is just the weighted average of the betasof the individual assets in the portfolio The weights being identical to those that define the portfolio

i = 1

n

i i

iiP

Value of stock Beta WeightStock A Rs 20 1.5 =20 / 100 = 0.2

Stock B Rs 30 0.7 =30 / 100 = 0.3

Stock C Rs 50 0.9 =50 / 100 = 0.5

Portfolio Value = Rs 100

Portfolio Beta = 0.2*1.5 + 0.3*0.7 + 0.5*0.9 = 0.96


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Systematic Risk Risk factors that affect a large number of assets

Also known as non-diversifiable risk or market risk

Includes such things as changes in GDP, inf lation,interest rates, war catastrophe etc

Beta & Systematic Risk A beta of 1 implies the asset has the same systematic risk

as the overall market

A beta < 1 implies the asset has less systematic risk thanthe overall market

A beta > 1 implies the asset has more systematic riskthan the overall market


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Nonsystematic Risk Risk factors that affect a limited number of assets

Also known as unique risk and asset-specific risk

Includes such things as labor strikes, part shortages,etc.


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Diversification


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Principle of Diversification Diversification can substantially reduce the variability of

returns without an equivalent reduction in expectedreturns This reduction in risk arises because worse than expected

returns from one asset are offset by better than expectedreturns from another

Diversification is not just holding a lot of assets For example, if you own 50 internet stocks, you are notdiversified However, if you own 50 stocks that span 20 differentindustries, then you are diversified There is a minimum level of risk that cannot be diversifiedaway and that is the systematic risk


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Benefits of Diversification Stability of income

Capital growth

Security of principal amount invested

Liquidity


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Diversifying Beta Effects Easy to track Beta effects in a portfolio

Mixing high-Beta assets with low-Beta assets gives

good portfolio effects Rationale for mixing bonds or bond funds (which tend

to be zero Beta) with market index funds, which tend tohave Beta close to 100%

An asset which moves with the market (high Beta) willtend to diversify well with an asset that does not movewith the market (zero Beta)


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CAPM Developed by Sharpe, Lintner and Mossin Follows logically from Markowitz mean-variance portfolio

theory ( beyond the scope of present discussion) The problem of constructing efficient portfolio To maximize return for a specified risk

R=Rf + (Rm-Rf) rf


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Calculating CAPM.

E.g.: Rf =8% Rm=14.5%

B=0.5

R=8+0.5(14.5-8)

R=11.25%

E.g.: Rf =8%

Rm=14.5%

B=1.5

R=8+1.5(14.5-8)R=17.75%


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ADVANTAGES ACTS AS A PROXY FOR RISK.

IT IS A CLEAR QUANTIFIABLE MEASURE.

SHARES BOUNCED MORE THAN THE MARKET.


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LIMITATIONS BETA IS NOT FUTURISTIC

BETA DOES NOT TAKE INTO ACCOUNT ALL THEFACTORS AFFECTING THE STOCK PRICES

ALL STOCKS HAS A TENDENCY TO COME TO

ACHIEVE NORMAL BETA i.e.1


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beta analysis

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