Calcualtion of Beta Based on Historical Returns of Real Estate Companies Form the Indian Market & Estimation of Their Optimal Debt/Equity Ratios

Topics: Capital asset pricing model, Mathematical finance, Investment Pages: 8 (1321 words) Published: December 15, 2010




Article Title Page no.

1 Conceptual background

1.1 Introduction1

1.2 Concept of Beta2

2 Measurement of historical Beta

2.1 Regression Approach4

2.2 Beta values5

2.3 Expected return using 6

Capital Asset Pricing Model

3 Appendix7 3.1 Formulae8

3.2 Exhibit 1 9

3.3 Exhibit 210

3.4 Exhibit 311

3.5 Exhibit 412

3.6 Exhibit 513

3.7 Exhibit 614

3.8 Exhibit 715

3.9 Exhibit 816

3.10 Exhibit 917

3.11 Exhibit 1018

4 Bibliography19

1.1 Introduction

Under the theory of the Capital Asset Pricing model the total risk of a stock is partitioned into two parts, namely Systematic risk & Unsystematic risk.

Systematic risk is the only risk relevant to a diversified investor.

The Beta coefficient measures measures systematic risk.

1.2 Concept of Beta

Beta value of a stock is the measurement of the volatility of a stock in comparison to the volatility of the market. It is a simple and very useful indicator that all traders and investors should be aware of. Calculation of beta value of stocks is essential with many trading/investing strategies especially with Capital Asset Pricing Model (CAPM), which describes how much risk that one can take to get a desirable return or vice versa.

Many financial sites, broker sites and trading platforms offer real-time and daily beta value of stocks. When calculating the beta value, the volatility of the market is taken as 1 and the beta of stock is calculated as how much the stock price moved in comparison to this market volatility. The value can take one of the following forms.

1)Negative beta: This is an interesting but rare condition where the price of the stock moves in reverse direction to the market movement. Usually no stock has prolonged negative beta value as most (all) them move with the market.

2)Zero beta:This is another rarity, where the price of stock stays same over time irrespective of market movement. This can sometimes happen in sideways moving markets, where no major economic/industry/company news is coming up.

3)Beta less than one: This happens when the stock price moves less in comparison of market. Many blue-chip and large-cap company stocks have beta value less than one, which make them qualify for low-risk investments. But these stocks tend to offer low-returns; and are not so suitable for short-term trading.

4)Beta of one: This happens when the stock price movement is same as that of market. This is true for many index-linked stocks and funds.

5)Beta greater than one: Beta exceeds one when the stock price movement surpass market movement. Many fast growing, mid and small-cap company stocks have beta higher than one. These stocks tend to offer better return for high-risk taken, but many of them are less suitable for long-term investing. Remember, very high beta levels may indicate low liquidity causing increase in volatility.

Knowledge of beta value is essential from a trader’s perspective as many...
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