Market Capital Is at Ion & BETA

A RESEARCH REPORT ON
“BETA AND MARKET CAPITALIZATION”
Dissertation Submitted in partial fulfilment for the award

Of
MASTER IN BUSINESS
ADMINISTRATION
For Bangalore University
SUBMITTED BY
DEEPAK KUMAR GUPTA

REG NO: 06XQCM6020
UNDER THE GUIDANCE OF

Dr. Nagesh Malavalli
Principal
M.P.BIRLA INSTITUTE OF MANAGEMENT

ASSOCIATES WITH BHARATIYA VIDYA BHAVAN
#43 RACE COURSE ROAD,
BANGALORE-560001
2006-2008
DECLARATION
I hereby declare that this dissertation work entitled BETA AND MARKET
CAPITALIZATION is a bonafide study, completed under the guidance and supervision of
Dr. Nagesh Malavalli and submitted in partial fulfilment for the award of MASTERS OF
BUSINESS ADMINISTRATION degree at Bangalore University.
I further declare that this project is the result of my own effort and that it has not been
submitted to any other university/institution for the award of any degree or diploma or any
other similar title of recognition.
BANGALORE DEEPAK KUMAR GUPTA

DATE: Reg No: 06XQCM6020
GUIDE CERTIFICATE
I here by certify that project work embodied in the dissertation entitled is the result of an
study undertaken and completed by Mr. Deepak Kumar Gupta bearing Reg No:
06XQCM6020 on ‘BETA AND MARKET CAPITALIZATION under my guidance and
supervision.
DATE: Dr. Nagesh Malavalli
Place: Bangalore Principal

PRINCIPAL CERTIFICATE
I here by certify that this project dissertation report is undertaken and completed by Mr.
Deepak Kumar Gupta bearing Reg. No. 06XQCM6020 on BETA AND MARKET
CAPITALIZATION under the guidance of Dr. Nagesh Malavalli Principal and Finance
Professor, M P Birla Institute of Management, Bangalore.
Date: Dr Nagesh Malavalli
Place: Bangalore Principal

ACKNOWLEDGEMENT
As students collect accolades in the form of grades for the success in his/her endeavours and
his/her success depends on adequate preparation and in domination and most important of all
the support received from his/her guide. So the accolades I earn of this project, I would like
to share with all those who have played a notable part in its making.
In these two months I have worked on it, I feel indebted to many and extend my heartful
gratitude and profusely thank those people who not only gave assistance to me but also
participated in the making of this project.
I sincerely thank to Dr. Nagesh Malavali (finance) my esteemed project guide, Prof.
Santhanam (statistics) Prof. Satyanarayan (finance) for his valuable advice, assistance and
guidance provided. I also remain grateful to all my friends for their assistance to prepare this
project successfully.
Deepak kumar Gupta

Table of Contents
Page
Ressearch Extract 2
Chapter -1 Introduction 3-10

i)Backgound of study 4
ii)Market Capitalization 4
iii) Beta 6
iv)CAPM & APM 8
Chapter-2 Review of literature 11-15
Chapter-3 Methodology 16-20

i)Problem Statement 17
ii)Research Objective 17
iii)Study Design 17
iv)Statical tool used 18
Chapter-4 Presentation and Analysis of data and 21-56

interpretation
Chapter-5 Summary and Conclusion 57-58
Bibliography 59
List of Graphs
Company Name Page

Graph 1 Aditya Birla Nuvo Ltd 22
Graph 2 Kotak Mahindra Bank Ltd 23
Graph 3 Nestle India Ltd 24
Graph 4 Tata Motors Ltd 25
Graph 5 Tata Power Company Ltd 26
Graph 6 Videocon Industries Ltd 27
Graph 7 Jindal Steel & Power Ltd 28
Graph 8 Yes Bank Ltd 29
Graph 9 ABB Ltd 30
Graph 10 ACC Ltd 31
Graph 11 Ambuja Cements Ltd 32
Graph 12 Axis Bank Ltd 33
Graph 13 Asian Paints Ltd 34
Graph 14 Bank of Baroda 35
Graph 15 Bosch Ltd 36
Graph 16 Grasim Industries Ltd 37
Graph 17 Bank of India 38
Graph 18 Aban Offshore Ltd 39
Graph 19 Larsen & Toubro Ltd 40
Graph 20 Mangalore Refinery And Petrochemicals Ltd 41
Graph 21 Neyveli Lignite Corporation Ltd 42

Graph 22 Punjab National Bank 43
Graph 23 Reliance Capital Ltd 44
Graph 24 Reliance Energy Ltd 45
Graph 25 Siemens Ltd 46
Graph 26 Tata tea 47
Graph 27 Thermax Ltd 48
Graph 28 Ultratech Cement Ltd 49
Graph 29 Union Bank of India 50

Graph 30 Mega 51
Graph 31 Tata Steel Ltd 52
List of Tables
Table 1 BETA Value of Small Cap and Mid Cap 53
Table 2 t-Test Value 54
Table 3 Beta Value of Mid Cap and Large Cap 55
Table 4 t-Test Value 56

Research Extract
The widely accepted capital asset pricing model (henceforth CAPM) developed by Sharpe
Lintner and Mossin postulates a simple linear relationship between a stock’s expected return
and its risk. However, recent evidence has shown that other factors have a consistent and
significant effect on common stock return. One of the most discussed relationships, and the
main focus of this study, is the one between a company’s size and the return on its stock. This
anomaly, now known as the size effect, has been the focus of recent studies conducted by
Fama and French as well as Daniel and Titman , however the seminal work was performed
by Banz in 1981. His findings show that the size of a firm and the return on its common stock
are inversely related. While Banz’s findings were shown to be accurate and his models
appear to address the possible econometric problems involved, he an not offer a theoretical
foundation for this relationship. Therefore, Banz suggests that size may be a proxy for other
factors that were not tested but are correlated to size.
In my research objective is to find out relation between beta and market
capitalization or firm size. It means during the firm size Small Cap to Mid Cap and Mid Cap
to Large Cap is there any relation with beta. For finding this relation I collect 30 companies
weekely average price data ,market capitalization (in Rs. Cr.) sensex index. From price and
sensex data find out return of share price & market return from both data using excel find out
beta value during different frim size (Small Cap,Mid Cap,Large Cap ) here I assume Small
Cap market capitalization is < 2000 Cr.,Mid Cap 2000 to 10000 Cr.and Large Cap >10000
Cr. I also test the data at level of 5% significance. I found from Small Cap to Mid Cap data is
significant but Mid Cap to Large Cap data is not significant. Our hypothesis is accepted
during Small Cap to Mid Cap beta is related with market capitalization.
Back ground of the study
Market Capitalization:
The “cap” is short for capitalization, which is a measure by which we can classify a
company's size. Although the criteria for the different classifications are not strictly bound, it
is important for investors to understand these terms, which are not only ubiquitous but also
useful for gauging a company's size and riskiness
Market capitalization represents the public consensus on the value of a company's equity. A
corporation, including all of its assets, may be freely bought and sold through purchases and
sales of stock, which will determine the price of the company's shares. Its market
capitalization is this share price multiplied by the number of shares in issue, providing a total
value for the company's shares and thus for the company as a whole.
.
Importance:
A common misconception is that the higher the stock price, the larger the company. Stock
price, however, may misrepresent a company's actual worth. If we look at two fairly large
companies, IBM and Microsoft, we see that their stock prices are $29 and $22.75
respectively. Although IBM's stock price is higher, it has approximately 1.73 billion shares
outstanding while MSFT has 10.68 billion. As a result of this difference, we can see that
MSFT ($243.5 billion) is actually quite larger than IBM ($127.8 billion). If we compared the
two companies by solely looking at their stock prices, we would not be comparing their true
values, which are affected by the amount of their outstanding shares. The classification of
companies into different caps also allows investors to gauge the growth versus risk potential.
Historically, large caps have experienced slower growth with lower risk. Meanwhile small
caps have experienced higher growth potential, but with higher risk.
What Is a Small Cap?
The meaning of "big cap" and "small cap" are generally understood by their names: big-cap
stocks are shares of larger companies and small-cap stocks are shares of smaller companies.
Labels like these, however, are often misleading. Small-cap stocks are often cited as good
investments due to their low valuations and potential to grow into big-cap stocks, but the
definition of small cap has changed over time. What was considered a big-cap stock in 1980
is a small-cap stock today. First, we need to define "cap" which refers to market
capitalization and is calculated by multiplying the price of a stock by the number of shares
outstanding. Generally speaking, this represents the market's estimate of the "value" of the
company; however, it should be noted that while this is the common conception of market
capitalization, to calculate the total market value of a company, you actually need to add the
market value of any of the company's publicly traded bonds .
The market generally classifies stocks into three categories:
• Small Cap under Rs.2 billion

• Mid Cap Rs. 2 - 10 billion
• Large Cap Rs.10 billion plus
Some analysts use different numbers and others add micro caps and mega caps, however the
important point is to understand the value of comparing companies of similar size during our
evaluation.
Why Consider Small-caps?
Every successful large-cap company started at one time or another as a small business. Small-
caps give the individual investor a chance to get in on the ground floor. Imagine having had
the foresight to invest in Microsoft when it was only a couple bucks a share! Another reason
to invest in small caps is that most mutual funds place heavy regulations making it difficult
for them to establish meaningful positions. Furthermore, it isn't uncommon form mutual
funds to invest hundreds of millions in one company. Most small-cap companies don't have
the market to support this size of investment. In order to buy a position large enough to make
a difference to their fund's performance, a fund manager would have to buy 20% or more of
the company. Individual investors who have the ability to spot promising companies can get
in before the institutions do. When institutions do get in, they will do so in a big way, buying
many shares and pushing up the share price. Fast growth is another reason to buy a small-cap
company. It is much easier to double revenues of Rs.2 million than it is for a large company
to double Rs.2 billion in revenues.
Mid Cap
Mid cap refers to stocks with a market capitalization of between Rs.2 billion to Rs.10 billion.
As the name implies, a mid-cap is in the middle of the pack. A mid-cap isn't too big, but at
the same time has a relatively decent market cap . In a mid cap portfolio the companies are
often the leaders and innovators in their Industries. They represent the future and their
earnings growth potential is often Greater than that of many larger companies. They often
provide hidden Opportunities and may become “The Blue-Chips of Tomorrow. Investors to
take a long-term view while investing in the equity markets. There is no ‘right time’ to invest
and it is the time one gives to their investments that matters. Investors who are comfortable
with the risk-reward profile of a mid cap scheme will benefit as the smaller companies grow
in size albeit with additional volatility over the years. However, investors need to keep in
mind that while mid cap funds give one an opportunity to go beyond the usual large blue chip
stocks, it is important to remember that mid/small cap stocks can be riskier and more volatile
than established blue chip large cap stocks. Therefore, the risk level of a mid-cap fund could
be higher than that of a fund seeking to invest in stocks of large well-established companies.
Beta
Risk is an important consideration in holding any portfolio. The risk in holding securities is
generally associated with the possibility that realised returns will be less than the returns
expected.
Risks can be classified as Systematic risks and Unsystematic risks.
• Unsystematic risks: These are risks that are unique to a firm or industry. Factors
such as management capability, consumer preferences, labour, etc. contribute to
unsystematic risks. Unsystematic risks are controllable by nature and can be
considerably reduced by sufficiently diversifying one's portfolio.
• Systematic risks: These are risks associated with the economic, political, sociological
and other macro-level changes. They affect the entire market as a whole and cannot
be controlled or eliminated merely by diversifying one's portfolio.
Beta (β) is a measure of volatility, or systematic risk, of a security or portfolio in comparison

to the market as a whole (most people use the Sensex Index to represent the market). Beta is
also a measure of the covariance of a stock with the market. It is calculated using regression
analysis.
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.
Covariance is a statistic that measures how two variables co-vary.
• A beta of 1 indicates that the security's price will move with the market.
• A beta greater than 1 indicates that the security's price will be more volatile than the market.
• A beta less than 1 means that it will be less volatile than the market.
You can think of beta as the tendency of a security's returns to respond to swings in the
market. For example, if a stock's beta is 1.2 it's theoretically 20% more volatile than the
market.
Differences between Beta on Different Resources
When evaluating the different options for finding beta, you may be wondering: Which one is
“right?” There is no right answer. There are several different methods to calculate beta. You
must be aware of how the different resources calculate beta and decide which one is right for
you. The following list highlights some of the major differences:
• Index Used
• Time Frame
• Calculation Method
• Historical Beta
Calculating Beta on Your Own

If you wish to have more control over how beta is calculated, can download historical prices
of a security and desired index (SENSEX) using any authentic stock market site
(capitaline.com, prowess.com..) and then run a regression in Excel by using slope formula.
The CAPM
This section presents a derivation of the capital asset pricing model (CAPM). The CAP-
model is a ceteris paribus model. It is only valid within a special set of assumptions. They
are:
• Investors are risk averse individuals who maximize the expected utility of their end of
period wealth. Implication: The model is a one period model.
• Investors have homogenous expectations (beliefs) about asset returns. Implication: all
investors perceive identical opportunity sets. This is, everyone have the same information
at the same time.
• Asset returns are distributed by the normal distribution.
• There exists a risk free asset and investors may borrow or lend unlimited amounts of this
asset at a constant rate: the risk free rate (Rf).
• There is a definite number of assets and their quantities are fixed within the one period
world.
• All assets are perfectly divisible and priced in a perfectly competitive marked. Implication:
e.g. human capital is non-existing (it is not divisible and it can’t be owned as an asset).
• Asset markets are frictionless and information is costless and simultaneously available to
all investors. Implication: the borrowing rate equals the lending rate.
• There are no market imperfections such as taxes, regulations, or restrictions on short
selling
CAPM formula.
Re = Rf + beta (Rm – Rf).
¾ In the CAPM model the beta variable is associated as systematic risk

¾ Rf = is the risk free rate, this is important because this is the rate investor could be
getting for no risk.
¾ Rm = is the risk of the whole market in general
¾ Re = is the expected return incorporating the risk free rate, market risk and beta value
SML which is the security market line is a graphical representation of the CAPM model.
This tells us that if a security are priced accurately the expected return of the securities meets
the securities beta at the security market line. However if they are below they line they are
overvalued, but if they are above the line their overvalued.
Arbitrage pricing theory

APT holds that the expected return of a financial asset can be modelled as linear function of
various macroeconomic factors or theoretical market indices, where sensitivity to changes
in each factors is represented by a factor- specific beta coefficient. The model-derived rate of
return will then be used to price the asset correctly the asset price should equal the expected
end of period price discount at the rate implied by model. If the price diverges, arbitrage
should bring it back into line.
If APT holds, then a risky asset can be described as satisfying the flowing relation:
Where
E(rj)is the risky asset’s expected return,
Pk is the risk premium of the factor,
Rf is the risk-free rate,
Fk is the macroeconomic factor,
Bij is the sensitivity of the asset to factor k, also called factor loading,
And €j is the risky asset’s idiosyncratic random shock with mean zero.
Relationship with the capital asset pricing model

The APT along with the capital asset pricing model (CAPM) is one of two influential theories
on asset pricing. The APT differs from the CAPM in that it is less restrictive in its
assumptions. It allows for an explanatory ( as opposed to statistical) model of asset returns. It
assumes that each investor will hold a unique portfolio with its own particular array of beats,
as opposed to the identical “market portfolio” . In some ways, the CAPM can be considered a
“special case” of the APT in that the securities market line represents a single- factor model
of the asset price, where Beta is exposed to changes in value of the market.
Additionally, the APT can be seen as a "supply side" model, since its beta coefficients reflect
the sensitivity of the underlying asset to economic factors. Thus, factor shocks would cause
structural changes in the asset's expected return, or in the case of stocks, in the firm's
profitability.
On the other side, the capital asset pricing model is considered a “demand side” model. Its
results, although similar to those in the APT, arise from a maximization problem of each
investor’s utility function, and from the resulting market equilibrium ( investors are
considered to be the “consumers” of the assets ).
Literature Review
Vijay B, AV vedpuriswar:-.Small Firm Effect in the Indian Stock Market an

Empirical Study. July 2002, journal of applied finance, volume 8
Small firm effect is a phenomenon where small firms have higher returns on average than
large firms. Such an anomaly would affect the pricing of capital assets.
Summary
Kiem (1983) has shown half of the small firms affect in January. The reasoning given by
kiem was that the investors sell securities at the end of the year to establish short term tax
losses for tax purposes this is seasonality in the stock returns, because in the new year stocks
go back to the equilibrium results creating the larger returns. Fama and French (1995)
extended their work to find relationship between firm size and firm earnings. They found that
small firm effect is prevalent and small firms have stronger earnings than larger firms. Sehgal
and Kumar (2002) done study on Indian stock market and they found that small firms have
abnormal returns and more of small firms are having higher relative distress.
Data
Study limits data of BSE 500 stocks and stocks are short listed to 273 on the basis of
continuously trading criteria from January 1991 to January 2002.
Methodology
In order to measure the returns monthly returns are used in the study then Two value
weighted portfolios are constructed on the basis of market value one portfolio including 25
small stocks and other including 25 large stocks out of BSE 500 stocks.
Results
Results shows that the beta of the large firms are more or less equal to the market beta and
priced efficiently while smaller firms beta was less than one . it may be due to poor trading of
the small stocks whereby they are perceived to be less sensitive to the market movement. then
Jensen.s alpha is shows that on an average consistently outperform the market returns but
larger firms generate equal or less returns than market returns.
Conclusion
The descriptive statistics suggests that an average the mean, standard deviation, skewness of
small companies are higher than large firms and the result do not support the infrequent
trading is the main reason behind the small firm effect and differential growth rates between
small firms and large firms ,market index helps to unwind the small firm effect.
An Exploratory Investigation of the Firm Size Effect. 1985, Journal of

financial economics, volume 14.
This paper investigates the firm size effect in the frame work of multi factor pricing model.
The risk adjusted return between the top five percent and bottom five percent of the NYSE
firms.
Summary
Empirical study of arbitrage pricing model (APT) CHAN (1981) (1983) found that firm size
effect is essentially captured by the factor loading of APT. To interpret the size effect K C
CHAN used the identifiable economic variables directly in a pricing equation. It is omparable
with inter temporal pricing models such as those of MERTON (1973), LONG (1974) ,
COX,INGERSOLL & ROLL (1976) here pricing equation is called as multi factor pricing
equation.
Stock market & macro economy:
Stock market reacts to changes in economic environment.

Here they used variables like
1. equity weighted NYSE index
2. value weighted NYSE index
3. monthly growth rates of industrial production( IPISA )
4. inflation
5. interest rates (T-bill)
6. A measure of change in the slope of the yield curve
Data
Investigation limits to the time period 1953-1977 and divided these 25 years into 20
overlapping intervals, like 1953 to 1958, 1954 to 1959 so on
Methodology
After ranking the portfolios according to the firm size CHAN used FAMA & MACBETH
(1973) method to test the firm size effect. Then they performed the cross sectional regression
of the 20 portfolios. Then 2 two types of tests are performed with the residuals.
1. Univariate analysis
2. Paired T test
To see if the estimated residuals from the two extreme firm size portfolios are statically
different.
Conclusions
They first explored the feasibility of a multi factor pricing equation as an explanation of the
firm size effect evidence suggests that firm size anomaly is essentially captured by a multi
factor pricing model .the higher average returns of smaller firms are justified by the
additional risks borne in an efficient market.
Christopher James and Robert o Edmister:-.The Relationship between

Common Stock Returns, Trading Activity and Market Value. September 1983,
Journal of finance volume 38
This study examines the relation between common stock returns, trading activity and market
value .results indicate that although firm size and trading activity are highly correlated,
differences in trading activity are not the underlying reason for the firm size anomaly the
finding of systematic differences in risk adjusted returns across stocks of firms different size.
Summary
Empirical research has revealed systematic differences in risk adjusted returns for the
common stocks of firms of different sizes as measured by the market value of outstanding
common stock BANZ (1981) , REINGANUM because of the small firm trade less frequently
than large firms ,risk measures obtained from daily or weekly returns data may seriously
underestimate the risk associated with holding a portfolio of small firms. Trading activity and
firm size are highly correlated however, no significant difference in mean daily risk adjusted
returns is observed between portfolios of the most actively traded firms and portfolios of the
least actively traded firms.
Data and Sample Selection:
Common stock returns and trading volume information for the NYSE and AMEX firms
examined in this study and data were obtained from the DATA RESOURCES
INCORPORATED FILE. Then 500 issues were selected for period 1975-1979 then stratified
random sample was employed .to ensure that an equal number of firms from each size decile
was included in the sample for each sample two measures of trading activity were
calculated(1) average daily trading volume ,(2) number of trading days.
Methodology
For each of the 4 sample years 3 sets of 10 equally weighted portfolios were constructed, on
the basis of market value, average daily trading volume, number of day.s the firm traded
during the year. Then mean return was calculated by combining portfolio return series for
each of the four years and then taking the arithmetic mean .then risk adjusted returns were
calculated by subtracting from the daily return series the OLS estimate of beta times the
return in market portfolio. Then F test was used whether the mean returns of the smallest firm
size portfolios are equal to the mean returns on largest size portfolios.
Conclusion
Paper addresses the question of whether the firm size effect is explicable in terms of
differences in trading activity between the large and small firms because of either a liquidity
premium associated with small firms or a misassessment of the risk of small firms no
evidence is found consistent with existence of a liquidity premium moreover ,differences in
trading activity do not appear to fully explain the existence of firm size effect through bias in
the estimation of beta.
Methodology
PROBLEM STATEMENT
Every company’s beta is not constant every time. Time to time company’s growth rate
changes, growth rate effect on companies earning per share. Many variables are also effecting
on share price. Many investors calculate expected earning by taking value of beta. Is value of
beta effect the share price, Is there any relation between Beta and Market Capitalization ?
RESEARCH OBJECTIVES
¾ To find out value of Beta & Market Capitalization from stock market
¾ To find out effect of beta with firm size.
STUDY DESIGN
a) Study Type:
The study type is analytical, quantitative and historical. Analytical because facts and existing
information is used for the analysis, Quantitative as relationship is examined by expressing
variables in measurable terms and also Historical as the historical information is used for
analysis and interpretation.
b) Study population:
Population is the daily closing prices of share and SENSEX Index.
c) Sampling frame:
Sampling Frame would be weekly closing prices of share SENSEX Index.
d) Sample:
Sample chosen is daily closing values of NIFTY Index from 01-01-2001 to 10-04-2008.
e) Sampling technique:
Deliberate sampling is used because only particular units are selected from the sampling
frame. Such a selection is undertaken as these units represent the population in a better way
and reflect better relationship with the other variable.
SAMPLE SIZE AND DATA SOURCES
Sample: The research investigation will be limited to a sample size of 30 different sectors
companies (Large Cap, Mid Cap, Small Cap). The sample size is based on simple random
sampling method
Data collection tools: The data would be generated through secondary data from Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE). This would be documented with
meticulous care. Data collected from capitaline.com
In this study SENSEX index has been considered as a proxy for the stock market and
accordingly the closing index values were collected from Jan 1,2001 till April 10, 2008. Here
we calculate the weekly variance from the data taken from above mentiond period .
CATEGRY OF FIRM SIZE
Small Cap : < 2000 Cr. (market Cap)

Mid Cap : 2000 to 10000 Cr.
Large Cap : > 10000 Cr.
HYPOTHESES
H0: No correlation between beta and market capitalization.
H1: There is correlation between beta and market capitalization.
Statistical tool used:
For presentation of market capitalization used graphs and for beta value presentation used
column chart hypothesis testing used t-Test by excel sheet
T-Test
The t-test assesses whether the means of two groups are statistically different from each
other. This analysis is appropriate whenever you want to compare the means of two groups,
and especially appropriate as the analysis for the post test-only two-group randomized
experimental design.
Statistical Analysis of the t-test

The formula for the t-test is a ratio. The top part of the ratio is just the difference between the
two means or averages. The bottom part is a measure of the variability or dispersion of the
scores. This formula is essentially another example of the signal-to-noise metaphor in
research: the difference between the means is the signal that, in this case, we think our
program or treatment introduced into the data; the bottom part of the formula is a measure of
variability that is essentially noise that may make it harder to see the group difference. Figure
1 shows the formula for the t-test and how the numerator and denominator are related to the
distributions.
Figure 1: Formula for the t-test.

The top part of the formula is easy to compute -- just find the difference between the means.
The bottom part is called the standard error of the difference. To compute it, we take the
variance for each group and divide it by the number of people in that group. We add these
two values and then take their square root. The specific formula is given in Figure 2
Figure 2. Formula for the Standard error of the difference between the means.
Remember, that the variance is simply the square of the standard deviation.
The final formula for the t-test is shown in Figure 3:
The t-value will be positive if the first mean is larger than the second and negative if it is
smaller. Once you compute the t-value you have to look it up in a table of significance to test
whether the ratio is large enough to say that the difference between the groups is not likely to
have been a chance finding. To test the significance, you need to set a risk level (called the
alpha level. In most social research, the "rule of thumb" is to set the alpha level at .05. This
means that five times out of a hundred you would find a statistically significant difference
between the means even if there was none (i.e., by "chance"). You also need to determine the
degrees of freedom (df) for the test. In the t-test, the degrees of freedom is the sum of the
persons in both groups minus 2. Given the alpha level, the df, and the t-value, you can look
the t-value up in a standard table of significance (available as an appendix in the back of most
statistics texts) to determine whether the t-value is large enough to be significant. If it is, you
can conclude that the difference between the means for the two groups is different (even
given the variability). Fortunately, statistical computer programs routinely print the
significance test results and save you the trouble of looking them up in a table.
Null hypothesis is accepted if the T test value is less than t-statistcs value otherwise null
hypothesis is rejected
Graph 1 (In Rs. Cr.)
Till 17/12/2004 company is in Small Cap during 17/12/2004 to 24/11/2006 it is in mid cap
after this company becomes a large cap market capitalization
Interpretation
During Small Cap beta is 0.39269, in Mid Cap beta increase to 0.688571 and in large Cap
beta is 0.433499
Till 03/10/2003 company is in Small Cap during 03/10/2003 to 11/08/2006 it is in mid cap
after this company becomes a large cap market capitalization
Interpretation
During Small Cap beta is 0.784003, in Mid Cap beta decrease to 0.717759 and in large Cap
beta is 0.985093
Till 10/02/2006 company is in mid Cap after this company becomes a large cap market
capitalization.
Interpretation
During Mid Cap beta is 0.102955 and in large Cap beta is 0.251509
Till 19/10/2001 company is in Small Cap during 19/10/2001 to 26/09/2006 it is in Mid Cap
after this company becomes a Large Cap market capitalization.
Interpretation
During Small Cap beta is 0.415687, in Mid Cap beta increase to1.065172 and in large Cap
beta is 0.686199
Interpretation
beta is 0.409965
Interpretation
beta is 0.689261
Interpretation
beta is 0.868477
Till 06/01/2006 company is in Small Cap after this company becomes a Mid Cap market
capitalization.
Interpretation
During Small Cap beta is 0.499414, in Mid Cap beta increase to 0.914258
Interpretation
beta is 0.558339
Till 30/12/2005 company iss in Mid Cap after this company becomes a Large Cap market
capitalization.
Interpretation
Till 02/11/2005 company is in in Mid Cap after this company becomes a Large Cap market
capitalization.
Interpretation
Interpretation
beta is 0.410824
Till 08/01/2002 company is in Small Cap during 08/03/20032to 26/10/2007 it is in Mid Cap
Interpreation
beta is 0.351418
Graph 1 4 (In Rs. Cr.)
Interpretation
beta is 0.5788279
Graph 1 5 (In Rs. Cr.)
Interpretation
During Small Cap beta is 0.277884, in Mid Cap beta increase to 0588698 and in large Cap
beta is 0.273424
Till 02/01/2004 company is in Mid Cap after this company becomes a Large Cap market
capitalization.
Interpretation
During Small Cap beta is 0.417145, in Mid Cap beta increase to 0.706879
Interpretation
beta is 0.0.595871
Interpretation
During Small Cap beta is 0.363651., in Mid Cap beta increase to 0.736648 and in large Cap
beta is 0.689348
capitalization.
Interpretation
capitalization.
Interpretation
During Mid Cap beta is-0.01558 and in large Cap beta is 0.0.123047
Interpretation
beta is 0.57405
Interpretation
During Small Cap beta is 0934142, in Mid Cap beta decrease to 0.844749 and in large Cap
beta is 0.695043
Interpretation
beta is 1.124859
capitalization.
Interpretation
During Small Cap beta is 0.462191 in Mid Cap beta is 0.761331
Interpretation
beta is 0.627026
capitalization.
Interpretation
During Small Cap beta is 0.578768, in Mid Cap beta is 0.578921
capitalization.
Interpretation
capitalization.
Interpretation
Interpretation
During Small Cap beta is 0.430009, in Mid Cap beta increase to 886332 and in large Cap
beta is 0.878786
capitalization.
Interpretation
beta is 0.0.665401
capitalization.
Interpretation
BETA Value during Small Cap & Mid Cap Table 1

Company Small Cap Mid Cap
Aditya Birla Nuvo Ltd 0.39269 0.688571
Kotak Mahindra Bank Ltd 0.784003 0.717759
Tata Motors Ltd 0.415687 1.065172
Tata Power Company Ltd 0.952363 0.659383
Videocon Industries Ltd 0.36754 0.462269
Jindal Steel & Power Ltd 1.023907 0.773546
Yes Bank Ltd 0.499414 0.914258
ABB Ltd 0.469798 0.46609
Axis Bank Ltd 0.527826 0.835481
Asian Paints Ltd 0.191247 0.23007
Bank of Baroda 0.688394 0.86612
Bosch Ltd 0.277884 0.588698
Grasim Industries Ltd 0.417145 0.706879
Bank of India 0.417523 1.090613
Aban Offshore Ltd 0.363651 0.736648
Neyveli Lignite Corporation Ltd 0.612648 1.241664
Punjab National Bank 0.934142 0.844749
Reliance Capital Ltd 0.761415 1.056705
Siemens Ltd 0.412303 0.521123
Tata Tea Ltd 0.578768 0.578921
Thermax Ltd 0.583434 0.537679
Union Bank of India 0.430009 0.886332

Industry :Diversified - Mega 0.377851 0.665401
Table 2
t-Test: Two-Sample Assuming Unequal Variances
Variable Variable
1 2
Mean 0.744962 0.542593
Variance 0.049023 0.056143
Observations 23 23
Hypothesized Mean
Difference 0
df 44
t Stat 2.99275
P(T<=t) one-tail 0.00226
t Critical one-tail 1.68023
P(T<=t) two-tail 0.004521
t Critical two-tail 2.015367
Interpretation
Here t -Test Statical value is 2.99275 that is grater than t -Critical value 2.015367
It means our null hypothesis is rejected and our hypothesis is accepted at level of
significance 5% data is significant. So I can say that beta value is effecting firm size.
Beta value at Mid Cap & Large Cap Table 3
Company Mid Cap Large Cap

Aditya Birla Nuvo Ltd 0.688571 0.433499
Kotak Mahindra Bank Ltd 0.717759 0.985093
Nestle India Ltd 0.102955 0.251509
Tata Motors Ltd 1.065172 0.686199
Tata Power Company Ltd 0.659383 0.409965
Videocon Industries Ltd 0.462269 0.689261
Jindal Steel & Power Ltd 0.773546 0.868477
ABB Ltd 0.46609 0.558339
ACC Ltd 0.58844 0.63941
Ambuja Cements Ltd 0.477272 0.5424
Axis Bank Ltd 0.835481 0.410824
Asian Paints Ltd 0.23007 0.351418
Bank of Baroda 0.86612 0.578279
Bosch Ltd 0.588698 0.273424
Grasim Industries Ltd 0.706879 0.655428
Bank of India 1.090613 0.595871
Essar Oil Ltd 0.998781 0.689348
Aban Offshore Ltd 0.736648 0.49523
Larsen & Toubro Ltd 0.034178 0.704817
Mangalore Refinery And Petrochemicals Ltd -0.01558 0.123047
Neyveli Lignite Corporation Ltd 1.241664 0.57405
Punjab National Bank 0.844749 0.695043
Reliance Capital Ltd 1.056705 1.124859

Reliance Energy Ltd 0.462191 0.761331
Siemens Ltd 0.521123 0.627026
UltraTech Cement Ltd 0.737854 0.34303
Union Bank of India 0.886332 0.878786
Tata Steel Ltd 0.211662 0.150456
Table 4
t-Test: Two-Sample Assuming Equal Variances
Variable 1 Variable 2
Mean 0.644129 0.574872
Variance 0.106139 0.056778
Observations 28 28
Pooled Variance 0.081458
Hypothesized Mean Difference 0
Df 54
t Stat 0.907951
P(T<=t) one-tail 0.183969
t Critical one-tail 1.673566
P(T<=t) two-tail 0.367938
t Critical two-tail 2.004881
Interpretation
Here t-Test statical value is 0.907951 that is less than t critical value 2.004881 at the 5% level
of significance the evidence supporting this relationship is extremely weak.
Summary & Conclusion
Smaller firms (in terms of market value of equity) earn higher returns than larger firms of
equivalent risk, where risk is defined in terms of the market beta. Small firm beta is higher
than mid cap. Large companies are retaining a smaller percentage of their earnings than the
small companies . A small company is more likely to reinvest its earning back into the
company causing the retain earning to grow faster and increasing the value of stock. Aslo
small firm not traded daily so its beta is volatile and in Large Cap firm many player trades so
its beta is near to market beta.
In first test Small Cap to Mid cap by t- Test statics value is grater than table value our
hypothsis is accepted means there is some relation between beta and market size.
In second case Mid Cap to Large Cap t-Test value is less than table value, the evidence
supporting this relationship is extremely weak at 5% level of significance.
There may be some reason to not supported strongly relationship with Large Cap one reason
may be my assumption for categories large cap is more than 10000 Cr. Capitalization but
today scenario should be more 50000 cr. Therefore here no difference between mid cap and
large cap. There are several contributing factors and earnings distribution may only be one of
them. This factor can be analyzed further to see how much of the size effect it accounts for.
Once that is established other theories can be approached in a similar manner in hopes of
fully explaining the size effect.
Books
Statistical methods- Levin and Rubin ,
Fundamental of statics - S.C.Gupta
Portfolio Management- Prassana Chandra
Financial Management – Prassnna Chandra
Internet Website
www.capitaline.com
www.prowess.com
www.google.com
www.encyclopedia.com
www.jstor.com
References
Christopher James and Robert o Edmister:-.The Relationship between Common Stock

Returns, Trading Activity and Market Value. September 1983, Journal of finance
volume 38
K.C Chan:-.An Exploratory Investigation of the Firm Size Effect. 1985, Journal of
financial economics, volume 14.
Vijay B, AV vedpuriswar:-.Small Firm Effect in the Indian Stock Market an
Empirical Study. July 2002, journal of applied finance, volume 8

Market Capital Is at Ion & BETA

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Market Capital Is at Ion & BETA

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A RESEARCH REPORT ON

“BETA AND MARKET CAPITALIZATION”

Dissertation Submitted in partial fulfilment for the award

DEEPAK KUMAR GUPTA

UNDER THE GUIDANCE OF

M.P.BIRLA INSTITUTE OF MANAGEMENT

BANGALORE DEEPAK KUMAR GUPTA

DATE: Dr. Nagesh Malavalli

Place: Bangalore Principal

Date: Dr Nagesh Malavalli

Place: Bangalore Principal

Deepak kumar Gupta

Chapter -1 Introduction 3-10

Chapter-2 Review of literature 11-15

Chapter-3 Methodology 16-20

Chapter-4 Presentation and Analysis of data and 21-56

Chapter-5 Summary and Conclusion 57-58

Company Name Page

Graph 2 Kotak Mahindra Bank Ltd 23

Graph 3 Nestle India Ltd 24

Graph 4 Tata Motors Ltd 25

Graph 5 Tata Power Company Ltd 26

Graph 6 Videocon Industries Ltd 27

Graph 7 Jindal Steel & Power Ltd 28

Graph 8 Yes Bank Ltd 29

Graph 9 ABB Ltd 30

Graph 10 ACC Ltd 31

Graph 11 Ambuja Cements Ltd 32

Graph 12 Axis Bank Ltd 33

Graph 13 Asian Paints Ltd 34

Graph 14 Bank of Baroda 35

Graph 15 Bosch Ltd 36

Graph 16 Grasim Industries Ltd 37

Graph 17 Bank of India 38

Graph 18 Aban Offshore Ltd 39

Graph 19 Larsen & Toubro Ltd 40

Graph 20 Mangalore Refinery And Petrochemicals Ltd 41

Graph 21 Neyveli Lignite Corporation Ltd 42

Graph 23 Reliance Capital Ltd 44

Graph 24 Reliance Energy Ltd 45

Graph 25 Siemens Ltd 46

Graph 26 Tata tea 47

Graph 27 Thermax Ltd 48

Graph 28 Ultratech Cement Ltd 49

Graph 29 Union Bank of India 50

Table 2 t-Test Value 54

Table 3 Beta Value of Mid Cap and Large Cap 55

Table 4 t-Test Value 56

What Is a Small Cap?

The market generally classifies stocks into three categories:

• Small Cap under Rs.2 billion

Why Consider Small-caps?

Beta (β) is a measure of volatility, or systematic risk, of a security or portfolio in comparison

Calculating Beta on Your Own

Re = Rf + beta (Rm – Rf).

¾ In the CAPM model the beta variable is associated as systematic risk

Arbitrage pricing theory

E(rj)is the risky asset’s expected return,

Pk is the risk premium of the factor,

Rf is the risk-free rate,

Fk is the macroeconomic factor,

Relationship with the capital asset pricing model

Vijay B, AV vedpuriswar:-.Small Firm Effect in the Indian Stock Market an