Beta Computation Of A Specific Scrip

 What is Beta…….

 The "beta" of a stock is a numerical value generally

regarded as a measure of risk for a particular

stock. Its value is based on the historical movement

of the stock price in relation to the market as a

whole.
Beta Computation Of A Specific Scrip

 What does it do……

 For example, if a stock price (on the average)
increases 10% when the market increases by 10%,
its beta is 1.0 . If a stock price (on the average)
increases 12% when the market increases by 10%,
its beta is 1.2 .On the average, high beta stocks will
return large profits when the market goes up, and
will have large losses when the market goes down.
Beta Computation Of A Specific Scrip

 Beta is therefore a measure of a security's

volatility, or how much its price moves in

relation to the average performance of the

stock market.
Beta Computation Of A Specific Scrip

 The factors that influence the overall market

include the economy, interest rates, inflation

and general investor confidence. Beta

coefficients for actively traded stocks can be

obtained from sources, such as the BSE

website.
Beta Computation Of A Specific Scrip
 You can calculate beta by comparing a security's
historical price movements with the movements of the
overall market as measured by an index, usually the BSE
Sensex or the Nifty. A security with a beta of 1.0
carries no more or less risk than the market in general.
When the market rises 4 percent, a stock with a beta of
1.0 is expected to rise 4 percent as well. When the
market falls 4 percent, such a stock ought to fall to the
same degree. With a beta of 2.0, a security should rise
10 percent whenever the market increases 5 percent and
fall 10 percent whenever the market dips 5 percent. A
stock with a beta of less than 1.0 rises or falls less
sharply than the overall market.
Beta Computation Of A Specific Scrip
 You can also use beta to measure the price
movements of your portfolio or of the holdings
of a mutual fund versus the market.

 Beta looks at what is called the systematic

risk, or market risk and is used in the Capital
Asset Pricing Model to compute the Cost of
Equity for use in finding out the Weighted
Average Cost of Capital .
Beta Computation Of A Specific Scrip

How does one compute Beta…….

Beta = Co variance (Sensex,Scrip) / Variance
(Sensex)
To calculate beta you need the following values:
X Historical % Returns of the Sensex
Y Historical % Returns of the Scrip
Beta = n* (XY) - (X)(Y) / n X² - (X)(X)
where n is the No of periods
Beta Computation Of A Specific Scrip
 Illustration…….
 Let's compute the Beta of Reliance Industries for the
period July 2001 to June 2002
 The table in the next slide gives us the Monthly closing
of the Sensex and Reliance Scrip and the % return
every month for the same as represented by X and Y
respectively. The columns XY and X² are computed and
used in the Beta formula where n is 11 as the number
of periods over which the returns are calculated.
Beta Computation Of A Specific Scrip
Close of Sensex X % return Reliance Y % return X*Y X²

2001

July 3329 320

CE Aug 3245 -2.52 310 -3.13 7.89 6.35

I AN Sept 2812 -13.34 266 -14.19 189.29 177.96

EL Oct 2989 6.29 255 -4.14 -26.04 39.56

R Nov 3288 10 290 13.73 137.3 100
Dec 3262 -0.79 305 5.17 -4.08 0.62
2002
Jan 3311 1.50 300 -1.64 -2.46 2.25
Feb 3562 7.58 307 2.33 17.66 57.46
March 3469 -2.61 301 -1.95 5.09 6.81
April 3338 -3.78 279 -7.31 27.63 14.29
May 3126 -6.35 264 -5.38 34.16 40.32
June 3245 3.81 270 2.27 8.65 14.52
 -0.21 -14.24 395.09 460.14
B e ta o f R e l ia n c e = 1 1 *3 9 5 .0 9 - ( -0 . 2 1 ) (-1 4 .2 4 ) / 1 1 *4 6 0 .1 4 - ( -0 .2 1 )( - 0 .2 1 ) B e ta = 0 . 8 6

T h u s i f th e Se n s e x we n t u p b y 1 0 %,R e l ia n c e wo u ld g o u p b y 8 .6 %

Caution…… Remember that beta is a statistical measure based on the past. There is
no guarantee it will predict the future.
Beta Computation Of An Equity Portfolio
 Using Beta factors of equities comprising a portfolio,
it is possible to work out a weighted arithmetic mean
Beta factor for the portfolio itself
 Illustration……
No of Price in Value in Beta *
Scrip Beta Weight
Shares Rs Rs lakhs Weight
1 15000 40 1.2 6 6/20=0.3 0.36

2 25000 20 1.8 5 5/20=0.25 0.45

3 15000 60 0.8 9 9/20=0.45 0.36

20 1.17

 The Beta Value of the portfolio is 1.17.This means that the

portfolio value will rise or fall little higher than the rise and
fall in the Sensex.
Beta Computation Of An Equity Portfolio
 Beta Impact on Contract Value of a Perfect
Hedge through Derivatives
 Thus if a perfect hedge through derivative
strategies is to be done the hedge should be by
shorting the Index futures or buying a put option
or selling a Call Option on Index Options not by a
contract value of Rs 20 lakhs but by one of Rs
23.40 lakhs
 Thank You
gaurav@scriptechindia.com
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