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A PRESENTATION ON CONCEPT OF BETA

What is Beta?
The beta coefficient is the relative measure of

sensitivity of an assets return to change in return on the market portfolio. It can be viewed as an index of the degree of the responsiveness of the securitys returns with the market return.

The beta coefficient, , is calculated by

relating the returns of a security with the returns for the market. Mathematically, the beta of security is the securitys covariance with the market portfolio divided by the variance of the market portfolio.

When >1 =the security is more risky. When <1=the security is less risky.

It can be calculated as:


= COV(S,M)
2 m

Eg:- Following information is available in respect of a security, S and the market portfolio M.
Probabilities S .3 .4 .3 10 16 32 Return M 11 20 19

Find out the of the security.

In order to find out the beta of the security, various figures have been calculated and summarised as follows:
S M

Avg expected return


Standard Deviation Variance

19%
.89 .00792 .00204

17%
.0395 .00156

.0024 .00156

= 1.3

Classification of Beta

PORTFOLIO BETA PROJECT BETA GEARED BETA UNGEARED BETA PROXY BETA FUNDAMENTAL BETA

PORTFOLIO BETA
It is used in the context of general equities. The Beta

of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio. E.g., if 50% of the money is in stock A with a beta of 2.00, and 50% of the money is in stock B with a beta of 1.00,the portfolio beta is 1.50. Portfolio beta describes relative volatility of an individual securities portfolio, taken as a whole, as measured by the individual stock betas of the securities making it up. A beta of 1.05 relative to the S&P 500 implies that if the S&P's excess return increases by 10% the portfolio is expected to increase by 10.5%

A measure of a portfolio's volatility. A beta of 1 means that the portfolio is neither more nor less volatile or risky than the wider market. A beta of more than 1 indicates greater volatility while a beta of less than 1 indicates less.
For example, if a portfolio consists of two securities, one valued at $15,000 and having a beta of 0.9 and the other valued at $10,000 and having a beta of 1.5, the portfolio beta is (0.9) ( $15,000/$25,000 ) + (1.5)( $10,000/$25,000 ), or 1.14

PROJECT BETA
Project beta basically studies the systematic

risk factor of any project . It basically measures the risk associated with a certain project . It is a part of capital budgeting decisions. It is a measure of sensitivity. For eg a company is starting up a project . In order to judge the sensitivity of a project a project beta is calculated of a company.

GEARED BETA
An indication of the systematic risk attaching to the returns on ordinary shares. It equates to the asset Beta for an ungeared firm, or is adjusted upwards to reflect the extra riskiness of shares in a geared firm., i.e. th Geared Beta. In the Capital asset pricing model (CAPM), it is the relevant measure of total equity risk. Also known as Geared beta . It is very well related to the debt concept

UNGEARED BETA

The asset beta, or corporate beta, or business beta, is a measure of the business risk in a sector; that is the business risk alone, unaffected by any financial risk that would be introduced by debt financing on the balance sheet (i.e. gearing). Each business sector has its own unique risks and so each business sector will have its own asset beta. It is not possible to convert an asset beta from one sector into an asset beta for another sector; each sectors asset beta has to be derived from statistical analysis (using least squares linear regression techniques).

Since the asset beta reflects purely business risk, a company with only equity finance on its balance sheet will find that its equity beta is the same as the sectors asset beta. This is because the company has no debt finance and so does not expose its shareholders to the financial risk associated with debt finance, hence the asset beta is also called an ungeared equity beta.

Other classifications of Beta


Equity Beta measures the systematic business risk and financial risk of a company. Asset Beta measures the systematic business risk only. Systematic risk that relates to macro economic factors and cant be diversified. Unsystematic risk is business related risk which can be reduced/eliminated thought diversification.

FUNDAMENTAL BETA
The product of a statistical model to predict the fundamental risk of the security using not only price data but other market related and financial Data.

PROXY BETA
It is used when the firm has no market listing and thus no Beta of its own. It is taken from a comparable listed firm, and adjusted as necessary for relative financial gearing levels, Hence Proxy Discount Rate.