How to Calculate Beta for a Company

Only available on StudyMode
  • Download(s) : 38
  • Published : January 21, 2013
Open Document
Text Preview
Resolved Question

I need to calculate beta of the company's stock?
eg: returns for co. are -5%, 5%, 8%, 15% and 10% over 5 years. the returns for stock exchange are -12%, 1%, 6% 10% and 5% for the same 5 years.

How to compute the beta of the company's stock?
* 5 years ago
* Report Abuse
anilwyd
Best Answer - Chosen by Asker
Bete is measure of Risk.
Year 1 Beta = -5/12 = 0.42
Year 2 Beta = 5/1 = 5
Year 3 Beta = 8/6 = 1.33
Year 4 Beta =10/10 = 1
Year 5 Beta = 10/5 = 2

Overall Beta for five Year = -5+5+8+15+10/(-12+1+6+10+5)
= 3.3

It means , when Index moves @ 1% the Company Share will move by 3.3%

The more the Bete , the more the Risk. also Return.

So be carefull in investing in Companies having high Beta.

The first thing you should know about stocks before adding them to your portfolio is that they carry a certain amount of risk. This is because the returns on stock are not guaranteed; not by the government, not by the company issuing the stock, and certainly not by your broker. That means that there is a chance that your actual return will be different than what you had expected. For instance, you might purchase stock under the expectation that its price will rise steadily over time and that it will pay you annual dividends. However, if the company experiences financial problems, you may not receive the price appreciation or the dividends that you expected. In fact, the company could even go out of business, in which case you could lose your entire investment. On the flip side, however, there is always the chance that the stock will outperform your expectations. It could double in price and start paying out hefty dividends, in which case you would enjoy a gain greater than what you had expected. Because there is uncertainty regarding which of the various possible outcomes will occur, you bear a certain amount of risk when purchasing the equity.

How do the risks associated with stocks affect your overall portfolio? That depends upon what other investments are in your portfolio. In general, the risks associated with investing in stocks are greater than the risks associated with investing in bonds or money markets . At the same time, however, the risks associated with investing in stocks are less than the risks associated with investing in options or futures . Of course, not all stocks pose the same level of risk: some (such as internet stocks) are much higher risk than others (such as utilities), so it's important to understand the amount of risk you would be taking on with any given investment.

In order to manage the risks associated with investing in stocks,most investors turn to a practice called diversification when building their stock portfolios. Diversification is a method of risk reduction in which investors buy multiple securities instead of just one. As a shareholder in en there is always the chance that another one could gain enough to offset the loss. It's basically just a way for you to not put all your eggs in one basket, which is also the concept underlying mutual funds . There are two ways to increase your diversification (and reduce your risk): increase the number of stocks you own or own stocks that are fundamentally different from one another. Of course, you can't totally eliminate all the risks involved in stock investing because there is still market risk, the risk that the entire market will fall. In that case, no matter how well diversified you are, your portfolio will suffer.

The other variable that will influence the amount of risk in your stock portfolio is your time horizon. Over the long, long term (several decades), history has shown time and again that stock prices outperform almost all other investments. However, in the short run stock prices often go down (about half the time, if the time period is sufficiently short). That means that if you are at a point in your life when you may need to sell your stocks in the short run (such as if you're close...
tracking img