What Is Beta

Published Date: 02 Nov 2017

Risk is a main concern in holding of several portfolios. The risk in holding securities is usually related with the opportunity that realizes returns will be less than the returns predictable. Risks can be divided into two parts such as Systematic risks and Unsystematic risks.

UNSYSTEMATIC RISKS

It is risks that are single to a firm or any industry. It includes various Factors such as management ability; consumer preference, manual labor, etc. give to unsystematic risks. Unsystematic risks are handling by nature wise and it can be significantly decrease by adequately diversifying one's portfolio.

SYSTEMATIC RISKS

It is risks that are connected with the various factors like economic, political, sociological and other macro-level changes. They involve the whole market as a whole and cannot be restricted or eliminate just by diversifying one's portfolio.

WHAT IS BETA

The level, to which different portfolios are affecting by these systematic risks as compared to the result on the market as an entire is different and is calculated by Beta. To put it differently, the systematic risks of a variety of securities be different due to their relationships with the market. The Beta aspect describes the movement in a stock's or a portfolio's returns in relation to that of the market return. For all practical purposes, the market returns are calculated by the returns on the index (sensex, etc.), as the index is a good indicator of the market.

METHODOLOGY

Beta is calculated as:

Where, Y is the returns on your portfolio or stock - dependent variable

X is the market returns or index - independent variable

Variance is the square of standard deviation.

BETA OF SELECTED SECURITIES

SR NO.

NAME OF THE SECURITY

BETA VALUE

1

HOUSING DEVELOPMENT FINANCE CORPO. LTD.

0.91

2

CIPLA LTD.

0.56

3

BHARAT HEAVY ELECTRICALS LTD

1.51

4

STATE BANK OF INDIA

1.51

5

DR. REDDY’S LABORATORIES LTD.

0.22

6

HDFC BANK LTD.

0.99

7

HERO MOTOCORP LTD.

0.7

8

INFOSYS LTD.

0.83

9

OIL AND NATURAL GAS CORPORATION LTD.

0.89

10

RELIANCE INDUSTRIES LTD.

1.05

11

TATA POWER CO. LTD.

1.15

12

HINDALCO INDUSTRIES LTD.

1.57

13

TATA STEEL LTD.

1.49

14

LARSEN & TURBRO LTD.

1.56

15

MAHINDRA & MAHINDRA LTD.

0.78

16

TATA MOTORS LTD.

1.51

17

HINDUSTAN UNILEVER LTD.

0.39

18

ITC LTD.

0.59

19

STERLITE INDUSTRIES(INDIA) LTD.

1.73

20

WIPRO LTD.

0.55

21

SUN PHARMACEUTICAL INDUSTRIES LTD.

0.51

22

GAIL(INDIA) LTD.

0.77

23

ICICI BANK LTD.

1.69

24

JINDAL STEEL & POWER LTD.

1.68

25

BHARTI AIRTEL LTD.

0.89

26

MARUTI SUZUKI INDIA LTD.

0.82

27

TATA CONSULTANCY SERVICES LTD.

0.57

28

NTPC LTD.

0.69

29

BAJAJ AUTO LTD.

0.69

30

COAL INDIA LTD.

0.54

INTERPRETATION

As per CAPM return 10 scripts were highly overvalued from 30 scripts compare with CAPM return 10 scripts were highly undervalued.

Highly overvalued scripts we taken as variable (X) and highly undervalued scripts we taken as variable (y).

From above calculation we find out the relation between variable (X) and variable (Y).

From above calculation we conclude that the correlation of coefficient for variable (X) and variable (Y) was negative (-0.55727) correlated.

The relationship between highly overvalued and highly undervalued scripts were negatively co-related, that means both were not moving together in the same direction with respect to SENSEX (BSE – 30) movement.

LIMITATIONS OF THE STUDY

Only 30 securities have been taken from Bombay Stock Exchange for the construction of portfolio.

Only 1 year data is collecting for the construction of portfolios.

Some of the data are not available so it is not possible to calculate 5 years calculation.

Minimum 5 years data require for the exact calculation of CAPM

CONCLUSION

According to CAPM model those securities are overvalued sell that securities immediately, those securities are undervalued buy that securities and those securities are properly valued hold, buy or sell those securities.

the majority of the stock prices moving the market index, When the SENSEX increases, stock prices also tend to increases and when the SENSEX decreases, stock prices also tend to decreases. That indicates that some primary factors which are affecting the market index as well as stock prices.

From above calculation we taken a year data of SENSEX on the basis of that we calculate CAPM return of year.

In the year of 2012-13 total 13 securities means 43.33% stocks are undervalued. so here opportunity to increase the average returns of portfolio by buying those securities which are undervalued.

While 16 securities means 53.33% stocks are overvalued so that sell those securities immediately.

While 1 security means 3.33%, stocks are properly valued. Properly valued stocks are lest as compare to overvalued and undervalued. While stocks are properly valued so hold, buy or sell those stocks depends on investors.

From above calculation we conclude that the correlation of coefficient for variable (X) and variable (Y) was negative (-0.55727) correlated.

The relationship between highly overvalued and highly undervalued scripts were negatively co-related, that means both were not moving together in the same direction with respect to SENSEX (BSE – 30) movement.

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