Transcript WHAT IS BETA? - Pravin Kolhe

“Analysis of Beta & Stock Returns”
Group No-8
Mr. Pravin Kolhe
Mr. Naresh Kumar Bairwa
Mr. Ayan Mukherjee
Mr. Owais Shaikh
WHAT IS BETA?
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Beta is a measure of the volatility, or systematic risk, of
a security or a portfolio in comparison to the market as
a whole.
Beta is used in the Capital Asset Pricing Model
(CAPM), which calculates the expected return of an
asset based on its beta and expected market returns.
It is also known as "beta coefficient."
In practice, Beta is measured by comparing changes in
a stock price to changes in the value of the S&P 500
index over a given time period
The S&P 500 index has a beta of 1.
WHAT IS STOCK RETURN
• The amount of net income returned as a
percentage of shareholders equity is known as
Stock Return.
• It measures a corporation's profitability by
revealing how much profit a company
generates with the money shareholders had
invested.
• It is expressed in percentage.
DATA COLLECTION
• Identified 6 sectors–
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Banking
O&G
Pharma
FMCG
Manufacturing
IT Services
• Selected few companies BSE Top 100 & collected
quarterly data from Jun-2001 to Jan-2012 using
Prowess.
– Beta
– Stock Return
– Market Return
METHODOLOGY
• Analysis of Sector wise Average Stock Return
– Using excel tools we calculated average stock
return for each sector.
– These Avg. Stock Return values for 6 sectors were
compared.
• Analysis of Sector wise Beta, Stock Return
– We calculated Market Return for each quarter for
all 6 sectors.
– Using Beta, Stock Return & Market Return we
prepared 6 graphs.
Comparison of Sector-wise
Average Stock Return
SECTOR WISE AVERAGE STOCK RETURN
Average Stock Return
0.89
0.87
0.66
0.64
0.23
0.19
BANKING
OIL & GAS
PHARMA
FMCG
MANUFACTURING
IT SERVICES
Above chart depicts the Average stock return for period of 10 years for different sectors.
Sector-wise Average Stock
Return
• Among the different sectors that we had
analysed, the stocks from the FMCG and Pharma
sector have returns almost in the same range.
• The stock returns of Manufacturing sector is
observed as quite higher than that of Oil & Gas
sector.
• The IT Sector stocks had the lowest stock returns
among all the sectors.
• IT stocks can be termed has highly volatile among
the sectors under analysis.
RELATIONSHIP BETWEEN RISK & RETURN
Significance of Beta
β <0
The stock moves contrary to the market in an inverse
relationship. As the market increases, the value of this stock is
expected to decrease. While this relationship theoretically
exists, few stocks possess a negative beta. One example of an
investment with negative beta is gold.
β =0
The stock’s returns are unrelated to market moves
0<β<1 The stock is expected to move more slowly than the market. If
the market rises, this stock should also rise but not as
drastically as the market; likewise if the market falls, this stock
is expected to be less volatile than the market.
β =1
The stock should move in a manner very similar to the market
as a whole
β >1
The stock has proven over time to be more volatile than the
market. As the market rises, this stock should rise at a higher
rate. Likewise, a more severe loss is anticipated in the event
the market falls.
Banking
Oil & Gas
Pharma
FMCG
Manufacturing
IT Services
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
Oct-08
Jun-08
Feb-08
Oct-07
Jun-07
Feb-07
Oct-06
Jun-06
Feb-06
Oct-05
Jun-05
Feb-05
Oct-04
Jun-04
Feb-04
Oct-03
Jun-03
Feb-03
Oct-02
Jun-02
Feb-02
Oct-01
Jun-01
Comparison of Sector-wise Beta:
Comparison of sectorwise beta
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Comparison of Sector-wise
Average Beta
SECTOR WISE AVERAGE BETA
Average Beta
1.217
1.080
0.880
0.871
0.697
0.508
BANKING
OIL & GAS
PHARMA
FMCG
MANUFACTURING
IT SERVICES
The average beta of each sector is presented above.
Analysis of Beta: Banking Sector
• The beta of banking sector for period Jul 2001
to Jun 2005 was less than 1, hence, stocks
moved more slowly than the market. After
this period the stock has proven over time to
be more volatile than the market.
Click for Plot
Analysis of Beta: Oil & Gas Sector
• The beta of Oil and Gas sector for entire study
period i.e. Jul 2001 to Jun 2012 was less than 1,
hence, stocks moved slowly than the market.
Click for Plot
Analysis of Beta: Pharmacy Sector
• The beta of pharmacy sector for entire study
period i.e. Jul 2001 to Jun 2012 was less than
1, hence, stocks moved more slowly than the
market.
Click for Plot
Analysis of Beta: FMCG Sector
• The beta of FMCG sector for entire study
period i.e. Jul 2001 to Jun 2012 was less than
1 and close to ~0.5, hence, stocks moved most
slowly than the market.
Click for Plot
Analysis of Beta: Manufacturing
Sector
• The beta of Manufacturing sector was
observed close to 1, for the entire study
period, this shows that the performance of the
stock was closed related to the market.
Click for Plot
Analysis of Beta: IT Services
Sector
• From Jun 2001 to Dec-2006, the beta of IT
sector was greater than 1, which means that
the stock had proven over time to be more
volatile than the market. As the market rises,
this stock raised at a higher rate. After Dec2006, the beta of IT sector was less than 1,
which means that stocks moved slowly than
the market.
Click for Plot
Conclusion
• Results indicate a systematic conditional relation
between risk and returns they do not guarantee a
positive risk return trade-off.
• Since the concerns regarding the weak correlation
between beta and the cross-section of returns appear
to be unfounded, the results support the continued use
of beta as a measure of market risk.
• Analysis shows beta is not the perfect measure of risks
but it helps you to analyze in a broad range how much
your stock returns can deviate.
• Beta is an integral part capital asset pricing theory
which is used to calculate required returns on a stock.
Thank you.
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