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PROJECT
FINANCIAL DECISION MAKING
TOPIC
“THE VARIABILITY OF BETA OVER TIME”

SUBMITTED TO
SIR KHALID SOHAIL

SUBMITTED BY
SANUM NASIM
SP14-RBA-010-ISB

***********

.........……………………16 Conclusions …………………………………………………………………….....19 .15 Analysis and over all estimation………………………….04 Attock refinery limited……………………………………………….07 Beta calculations and Methodologies …………………………………………08 Beta Interpretations and estimation ………………………………………………09 Shell monthly data regression model……………………………………………11 Shell monthly data Scatter diagram……………………………………………11 Attock beta estimation summary………………………………………………14 Attock monthly data regression model…………………………………………14 Attock monthly data Scatter diagram…………………………………………...17 Calculation ……………………………………………………………………....05 What is beta……………………………………………………………………..18 References……………………………………………………………………….........2 TABLE OF CONTENT Introduction………………………………………………………………………03 Shell Pakistan limited ……………………………………………………....06 Variability of beta over time…………………………………………….......

weekly. Rate of returns can be calculated as daily. Basically the betas of securities with smaller market value than the average of the market will decrease as the return interval is shortened. fortnightly and monthly basis then with the help of those returns on different time interval betas can be estimated and its variability over time.3 INTRODUCTION: Stock’s or security’s betas may vary substantially depending upon whether it is estimated on the basis of daily. This suggest that betas measured over return intervals of arbitrary length will tend to be less risky than truly are. whereas the betas of securities with a large market value relative to the market will increase. whereas securities with relatively large market values may appear to be more risky than they truly are. weekly. fortnightly or monthly returns of that security. . Security’s historical rate of returns can be used to estimate its systematic risk.

the name of changed to Pakistan Burmah Shell (PBS) Limited. with the Group now having a 76% stake in Shell Pakistan Ltd (SPL) . The company for businesses provides Shell cards. Shell Pakistan has a primary listing on Karachi Stock Exchange. In February of 1993.4 1. quality of products. In 1970. lubricants and aviation.    PRODUCTS: Shell Pakistan Limited (Shell Pakistan) is engaged in marketing of compressed natural gas and petroleum. Shell Petroleum stepped into raise its stake to 51%. the name was changed to the Burmah Shell Oil Distribution Company of Pakistan. Shell Pakistan has successfully positioned itself as the preferred oil and Gas Company in Pakistan. exploration and production. car care . as economic liberalization began to take root and the Burmah divested from PBS. After the independence of Pakistan in 1947.SHELL: Shell Pakistan Limited (SPL) is a subsidiary of Royal Dutch Shell Plc and has been in South Asia for over 100 years.  SHELL PAKISTAN LIMITED AT GLANCE: The second largest oil company in the country. automotive and sugar. which has interests in downstream businesses including retail. The years 2001-2 have seen the Shell Petroleum Company successively increasing its share. It’s also listed on Lahore and Islamabad Stock Exchange.an expression of confidence. The history of Royal Dutch Shell in Indo Pak subcontinent dates back to 1903. safety and environmental protection. liquefied petroleum gas and industrial operations for power.    HISTORY: The Shell brand name enjoys a 100-year history in this part of the world. Shell Pakistan for motorists provides customer service. In 1928. aviation customer service. The Shell and the Burmah Groups retained the remaining 49% in equal propositions. Shell is a global group of energy and petrochemical companies. when 51% of the shareholding was transferred to Pakistani investors. Shell Pakistan Limited. Royal Dutch Shell and the Burmah Oil Company Limited in India were merged and Burmah Shell Oil Storage & Distribution Company of India was borne. leading the field in its commitment to customer service. The company provides different types of lubricating oil and caters to businesses and motorists. transport. Shell’s flagship business in Pakistan is the downstream retail marketing company.

   HISTORY: Since its commissioning in 1922. The Company produces a range of petroleum products. The Refinery is situated on the coastal belt of Karachi. ARL has passed through various stages of transformation and stood the test of time through war and peace. The company also participates in Pakistan is headquartered in Karachi. The company is also registered with the Central Depositary Company of Pakistan (CDC). Pakistan. jute batching oil (JBO). kerosene oil. shell Helix motor oil and Shell advance motorcycle oil. The Company had one wholly owned subsidiary. JP-1. Besides being also engaged in power generation. light diesel oil (LDO). such as liquefied petroleum gas (LPG). JP-8. today it has grown into a modern state-of-the-art refinery with a capacity of 43. unleaded petroleum solvent grade (PMG).5 tips. low sulfur fuel oil (LSFO). premium motor gasoline. ARL’s plants have been gradually upgraded and replaced with state-of-the-art hardware to remain competitive and meet new challenges and requirements   ATTOCK REFINERY PAKISTAN LIMITED AT GLANCE: Attock Refinery Pakistan Limited is a member of Attock Group of Companies. mineral turpentine (MTT). 2. high speed diesel (HSD). . Pakistan.500 barrels per day (BPD). Pakistan Refinery Limited was incorporated in Pakistan as a public limited company in May 1960 and is quoted on the Karachi and Lahore Stock Exchanges. and refining to marketing of a wide range of petroleum products in Pakistan. It was subsequently converted into a Public Limited Company in June 1979 and is listed on the three Stock Exchanges of the country.ATTOCK REFINERYLIMITED: Attock Refinery Limited (ARL) is the pioneer in crude oil refining in the country with its operations dating back to the early nineteen hundreds. cut back asphalts and polymer modified bitumen (PMB). From batch distillation stills of 2. naphtha. furnace fuel oil (FFO). paving grade asphalts.000 BPD. Backed by a rich experience of more than 90 years of successful operations. manufacturing and trading of cement and other entrepreneurial activities in Pakistan. a fully integrated group covering all segments of oil and gas industry from exploration to production.  PRODUCTS: Attock Refinery Limited is a Pakistan-based company engaged in the refining of crude oil.

The estimated beta will be biased if the security does not frequently trade. risk is quantified by beta. that stock's excess return over and above a short-term money market rate is expected to move 1. Roughly speaking. Betas may change through time.e.to the returns of the market portfolio  Beta is the slope (coefficient) in the regression of asset . a security with a beta of 1.5 times the market excess return. 1. or systematic risk of a security and a portfolio in comparison to the market as a whole where risk is a consideration in every investment decision and.!!!! “BETA is a measure of risk” It is the measure of the volatility.return (risk premium) on the market’s return (market risk premium)  Beta is a relative measure of risk   Beta < 1 : defensive asset  Beta = 1: neutral asset  Beta > 1: aggressive asset It is basically the asset's risk in relation to the market.5 times the market return. According to the capital asset pricing theory beta represents the type of risks or systematic risks so when using beta there are a number of   issues that you need to be aware of. for a stock. More precisely. note that the beta is a measure of co-movement it is possible for a security to have a zero beta and higher volatility than the market. on average. Betas may be different depending on the direction of the market i. .  WHAT IS BETA…. betas may be greater   for down moves in the market rather than up moves. The beta is not necessarily a complete measure of risk (you may need multiple betas). Beta is used in the capital asset pricing model (CAPM).32% shares of the Company. a model that calculates the expected return of an asset based on its beta and expected market returns.  Beta measures how sensitive are the returns of asset .6 Attock Hospital (Private) Limited and Attock Oil Company Limited with 65.5 will have move. Also.

In reality only the historical returns are available to estimate Beta. which as a result will also be the historical Beta. if a stock's beta is 1. It estimate the risk in equilibrium in which investors maximize a utility function that depends on the mean and variance of returns of their portfolio. The variance of returns is a questionable measure of risk for at least two reasons: First. both the symmetry and the normality of stock returns are seriously questioned by the empirical evidence on the subject. Rate of returns can be calculated as daily. theoretically. A beta of 1 indicates that the price of a security will move in tandem with the market. it is an appropriate measure of risk only when the underlying distribution of return is symmetric.  The stability of Beta has also been a controversial issue in the literature. In various studies it is used different sets of data over various time periods and observed the change in Beta estimates through time.2. a beta less than 1 means that the security will be less volatile than the market. It's one of those at-a-glance measures that can provide serious stock analysts with insights into the movements of a particular stock relative to the overall market. in general. Basically security’s historical rate of returns can be used to estimate its systematic risk. it can be applied straight forwardly as a risk measure only when the underlying distribution of returns is normal. There is a big question mark on using the historical Beta as an estimate of future Beta because empirically evidence shows that Betas on individual stocks have not been stable over  time. For example. fortnightly and monthly basis then with the help of those returns on different time interval betas can be estimated and its variability over time number of studies emerged to investigate the stability of Beta.  BETA VARIABILITY: BETAS CANNOT BE STABLE OVER TIME: Stock analysts use beta the statistical measure all the time to get a sense of stocks' risk profiles. it's 20% more volatile than the market. Perhaps the single most important measure of stock risk or volatility is a stock's beta. indicate that stock Betas are not stable because . A beta more than 1 indicates that the security's price will be more volatile than the market. weekly. Second. However. Their outcomes.7 In general beta is calculated by using regression analysis as per the beta having the tendency of a security's returns to respond to swings in the market.

MSN Money. to calculate a stock's beta two sets of data are needed:  Closing stock prices for the stock being examined. It's also possible to calculate beta using a fairly straightforward linear regression technique that's available in a spreadsheet application such as Microsoft's Excel or Open Office’s Calc. In fact. and Google Finance.  BETA CALCULATIONS AND METHODOLOGIES: It's possible to find calculated beta values on all of the major stock reporting websites. It only measures the past volatility.  Closing prices for the index being chosen as a proxy for the stock market.    AVERAGE FORMULA . The future performance and volatility of the stock depends on the current and future set of economics and the choices that management makes in the future. values are calculated using the month-end stock price for the security.8 betas are not statistically related to returns as stock does not stay constant over time. Most of the time. and the month end closing prices. including Yahoo Finance.  METHODOLOGIES AND FORMULAS: Beta can be calculated by various methodologies and formulas some of them are.

250 daily returns. . 72 fortnightly and 156 weekly returns by considering KSE-100 index as market proxy.9    COMPUTATIONAL FORMULA    CONCEPTUAL FORMULA N (sum XY)-sum XY/N (sum X^2)-(sum X)^2    SLOPE. which have been estimated using 36 monthly returns. weekly. COVARIANCE AND VARIANCE FORMULA  BETA INTERPRETATIONS AND ESTIMATIONS This project findings are based on two companies Shell Pakistan limited and Attock Refinery Pakistan Limited and their returns at daily. fortnightly and monthly basis with their estimated betas of three-year periods from July 2011 to June 2014.

474087 1.5641 0.305148831 2nd year 0.10    SHELL PAKISTAN LIMITED ESTIMATED BETAS :    MARKET MODEL BETAS MARKET DAILY WEEKLY FORTNIGHTLY MONTHLY 1st year 0.365836 2.872783861 1.49534 0.883043 1.0938 0.49533965 0.1987 SCATTER DIAGRAM: 2.196878513 MODEL   CAPM: CAPM DAILY WEEKLY FORTNIGHTLY MONTHLY 1st year 0.196879 Computation Beta Year 1 Conceptual Beta Year 1 0.474086598 1.38753 3rd year 0.5640 0.3875303 3rd year 0.220793 -0.4390 1.229207885 -0.1987 .305 0.2936 1.365835779 2.305149 2nd year 0.881161486 1.871291 1.4390 Year 2 Year 3 Year 3 2.26540 0.9350 0.2654 0.

0267988089418248 -0.91558 0.001416828 95.91558 .0318485150883921 Significance F Lower Upper F Lower Upper 95%12.09739641 Observations 34 ANOVA Coefficient Regression s Intercept Residual -0.0% 95.05 0.27610977 Adjusted R Square 0.419336977 0.15 0.05 0 -0.2 -0.1 0.0267988089418248 -0.1 REGRESSION ANALYSIS SUMMARY OUTPUT Regression Statistics Multiple R 0.50453 1.009486061 0.34636 3.02107 0.031484 Total 1.50455 1.1 Linear () 0.2 -0.3 0.493651 0.2 0.525461483 R Square 0.253488201 Standard Error 0.11 Shell Scatter Diagram 0.010145 0.05736 0.00141 Line Fit Plot Predicted -0.115783036 0.4 -0.1 0.0% -0.1 0 -0.0210 -0.30355394 0.019254 -0.2100703 df SS MSP-value Standard t Stat 1 0.115783036 Error 32 0.353044 33 0.05736 0.942408 0.1 0 0.20559733 95% 0.

2 Residuals 0 -0. fortnightly and monthly basis whereas the daily beta is 0.495339.05 0 -0. As per interpreting here stock risk price movements are compared to the movements of an overall market indicator such as a market index. So according to the stock risk factors having high and low betas. and 0.15 -0. fortnightly and monthly basis so as securities with a larger market value than the average of all securities outstanding will generally have an increasing beta.4 -0.    ATTOCK REFINERY PAKISTAN LIMITED ESTIMATED BETAS: . On the other hand if there the return interval is shortened and the other securities with a smaller market value than the average of all securities outstanding (the market) will generally have decreased beta.05 0. As analyzed here higher risk stocks come up with either more high and low returns as compare to the lower risk stocks to get a better feel for a stock's risk profile.22920. over the same period of time which interpret the CAPM’s beta as that if high beta stocks are more probable than low beta stocks either very high or very low returns which is also has taken into account in our analysis of stocks which experiences that high beta stocks are more risky as compare to the lower beta stocks. Shell Pakistan limited estimated betas returns are 0.5641 in 1st year which is greater than the weekly. So we can say this that in a rising market. but in a declining market you would be better served to low-beta stocks.1 0.4 0.1 -0.-0. it is advantageous to have high-beta stocks.305148estimated on weekly.2 0.0318485150883921 ANALYSIS: While estimating betas of Shell I have analyzed that the concept of beta as a measure of individual stock risk relative to the overall risk of the stock market.12 Residual Plot 0.

1422 1.559 -o.2063 1.13    MARKET MODEL BETAS MARKET MODEL 1st year 2nd year 3rd year DAILY WEEKLY FORTNIGHTLY MONTHLY 1.558 0.975854 0.2564 0.04025 0.742374 1.558452 0.4073 1.408542 Computation Beta Year 1 Y Conceptual Beta Year 1 0.2565 0.8092 0.265103 1.408541635   CAPM: CAPM 1st year 2nd year 3rd year FORTNIGHTL DAILY WEEKLY 1.611154 -0.611154 -0.1422 1.7170 -0.975854 0.2063 1.80919615 0.742374 1.7170 Year 2 Year 3 Year 3 1.917160441 0.4073 MONTHLY .558452128 0.264351915 1.03666871 0.917212 0.

152941754 Adjusted R Square 0.126471184 Standard Error 0.042676 2.1 0.047464387 0.03184 8 Coefficient s -0.310342895 MS 0.047464387 0.43131 8 .4 REGRESSION ANALYSIS Regression Statistics Multiple R 0.0% 0.40370620 8 F 5.77476872 4 Df 1 32 33 Standard Error 0.777804 0.391077683 R Square 0.2 -0.03573 2 1.966224 Lower 95% -0.3 0.118219 1 Upper 95.008214953 t Stat P-value -0.01791767 8 0.022196 0.035732 0.118219 1.0007646 0.09063638 Observations 34 ANOVA Regression Residual Total Intercep t 0.1 0 0.2 0.037261 0.0% 0.32232255 4 SS 0.14 SCATTER DIAGRAM: Attock Scatter Diagram Linear () -0.03726 Upper 95% 0.431318 Significance F 0.262878509 0.022195958 Lower 95.

0146663407479835 -0.0146663407479835 0. it is advantageous to have high-beta stocks. So according to the stock risk factors having high and low betas Attock Refinery Pakistan limited estimated betas returns are 0.2565 in 1 st year and it is analyzed that the it is larger market value than the average of all securities outstanding soas here as well securities with a larger market value than the average of all securities outstanding will generally have an increasing beta.0318485150883921 0. As per interpreting here stock risk price movements are compared to the movements of an overall market indicator such as a market index. fortnightly and monthly basis whereas the daily beta is 1. 0.2 0 -0. So we can say this that in a rising market. and0. but in a declining market you would be better served to low-beta stocks.1 Residuals 0. over the same period of time which interpret the CAPM’s beta as that if high beta stocks are more probable than low beta stocks either very high or very low returns which is also has taken into account in our analysis of stocks which experiences that high beta stocks are more risky as compare to the lower beta stocks.15 -0. And on the other hand if there the return interval is shortened and with the following occurs. securities with a smaller market value than the average of all securities outstanding (the market) will generally have decreased beta.2 -0.05 0 -0.1 -0.15 Line Fit Plot Residual Plot 0. As analyzed here higher risk stocks come up with either more high and low returns as compare to the lower risk stocks to get a better feel for a stock's risk profile.05 0.4 Predicted 0.0318485150883921  ANALYSIS While estimating betas of Attock I have analyzes the concept of beta as a measure of individual stock risk relative to the overall risk of the stock market.1 0.1 0 0.975854. Market value is also commonly used to refer to the market .2 0.558452 estimated on weekly.917212.

And on the other hand if there the return interval is shortened and with the following occurs. fortnightly and monthly basis whereas the daily beta is 1.975854.5641 in 1st year which is greater than the weekly.012.850. .29 x 85. On the other hand Attock Refinery Pakistan limited estimated betas returns are 0. and0. 0.558452 estimated on weekly.16 capitalization of a publicly-traded company.330 = 29.917212. and 0.970 OVER ALL ESTIMATION Shell Pakistan limited estimated betas returns are 0. securities with a smaller market value than the average of all securities outstanding (the market) will generally have decreased beta. Number of Shares Outstanding: Shell Pakistan Limited Attock Refinery Limited = 107.22920.000= 18.2565 in 1 st year and it is analyzed that the it is larger market value than the average of all securities outstanding so as here as well securities with a larger market value than the average of all securities outstanding will generally have an increasing beta.495339.305148estimated on weekly.293.565.-0. fortnightly and monthly basis so as securities with a larger market value than the average of all securities outstanding will generally have an increasing beta.012.330 = 85. and is obtained by multiplying the number of its outstanding shares by the current share price.28 x 107.106.000 Market value of Share Outstanding MVSO of Shell Pakistan Limited= 276.366. fortnightly and monthly basis whereas the daily beta is 0.532 MVSO of Attock Refinery Limited= 212.293.

In general. And it is concluded that betas measured over return interval of arbitrary length will tend to be biased. the betas of securities with a smaller market value than the average of all securities outstanding will decrease as the return interval is shortened whereas the betas of the securities with the large market value relative to the market will increase. whereas securities with small market value of shares outstanding will have estimated betas that are biased downward considered as market of arbitrary length are biased so high market values will appear to be more risky as compare to the lower market values so other way round we can say that it's hard not to think that stock will be riskier than say a safe-haven utility industry stock with a low beta. whereas securities with relatively large market values may appear to be more risky than they truly are.17  CONCLUSIONS So it is concluded that a stock's price variability is important to consider when assessing risk where risk as the possibility of a stock losing its value as beta has appeal as a proxy for risk. Intuitively. it makes sense that stock with a price that bounces up and down more than the market because securities with large market value of shares outstanding will have estimated betas that are biased upward. As in this project it has figured out three patterns out of that the beta stability seemed to be dependent on the return interval and also the analysis on portfolios implies that diversification and beta stability are positively correlated. . In particular securities with relative market values may appear to be less risky than they truly are.

18 Calculation s .

Kothari. Sharpe and Guy M. no. “Reports of Beta’s Death Have Been Greatly  Exaggerated. “Risk-Return Classes of New York Stock Exchange Common Stocks: 1931–1967. Paul D.” Financial Analysis Journal 28. Peterson. Meir Statman. no. 34.R. and James D. 3 (Spring 1988): 64–69. no. Cooper.” Journal of Finance 50. P. “A Comparison of Published Betas.” Journal of  Portfolio Management 14. ”Journal of Portfolio Management 23.2 (Winter 1981): 41–44. C. Lee. 1982. 4 (Summer 1997):  104–111. Reilly and David J. Chen. Kaplan. “Estimates of Small-Stock Betas Are Much Too Low. Carpenter and David E. Value Line. 3 (Spring 1996): 36–44. 2 (Winter 1981): 60–64. 210-206 ***************** . Sloan. “Another Look at the Cross Section of Expected Stock Returns. no. Ibbotson. 2 (March– April 1972): 46–54S. no. “Beta Stability and Tendency: An Application of a Variable Mean Response Regression Model. “Betas Compared: Merrill Lynch vs. Roger G. “Trading Volume and Beta Stability.” Journal  of Portfolio Management 7. no.19 REFRENCES  Michael D. Frank K. C.” Journal of Economics and Business. and Richard G. William F. Wright.” Journal of Portfolio  Management 7.. no.F. Kevin Grundy and Burton Malkiel. Jay Shanken. 2 (March  1995): 185–224.” Journal of Portfolio Management 22. Upton.