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# STOCK ANALYSIS- MAHAM HAIDER BBA 3

BETA:

The beta coefficient is a measure of the extent to which the returns on a given stock move with
the stock market. It is basically a number, between zero and two that expresses the ratio between
movement in a particular stock and movement in a larger market. It is also known as the
correlated relative volatility. In this particular assignment, we calculated the beta using the
regression tool. The slope of the line shows how each stock moves in response to the movement
in the general market. The slope coefficient of such a “regression line” is known as the beta
coefficient.

## Above Average Market Risk β > 1.0

Average Market Risk β = 1.0
Below Average Market Risk β < 1.00

The Beta Coefficient for Adamjee Insurance is 1.6197, and classifies within the above average
market risk. Such a high value corresponds to a higher risk, since the stocks will just not rise
with the market but also fall at a rate higher than the broader market. Therefore we can classify
Adamjee Insurance stock as a risky investment.

The Beta coefficient for IGI Insurance is 1.2531, and this can also be classified as an above
average market risk stock. IGI Insurance stocks will fall and rise to a greater extent than the
stock market movements. In this case, the stock market under consideration is the KSE- 100
index.

STANDARD DEVIATION:

## Standard Deviation is a measure of the tightness, or variability of the probability distribution of

the expected returns from an investment. A smaller standard deviation indicates the low risk
associated with an investment, while a higher value of standard deviation indicates vice versa. It
also indicates whether the expected returns are deviating from the expected/ average returns. The
standard deviation for Adamjee Insurance is 0.08376, while the standard deviation for IGI
Insurance is 0.08069. Both of them have similar standard deviations meaning that the risk
associated with both the stocks is similar. The difference between the standard deviations of
Adamjee and IGI is of 0.00307. Therefore IGI Insurance is somewhat a less risky investment
compared to Adamjee Insurance.

COEFFICIENT CORRELATION:

The Coefficient Correlation can be defined as a statistical measure of how two securities move in
relation to each other, and the degree of their relationship. The Correlation Coefficient of
Adamjee and IGI is 0.51205. This indicates that they are positively correlated, but there is no
perfect correlation, which happens when the coefficient is 1.00. Investments which have a
STOCK ANALYSIS- MAHAM HAIDER BBA 3

positive 0.5 correlation tend to rise and fall in value at the same time, and this is the case with
Adamjee and IGI Insurance. When the coefficient correlation is of such a value, combining
stocks into portfolio reduces risks but does not eliminate them completely. The portfolio standard
deviation is lower than the individual standard deviation of both the stocks i.e. 0.0715012. This
means that the risk is somewhat diversified, but is not eliminated because of a portfolio.
Therefore the riskiness of the portfolio will be reduced as the number of the stocks in the
portfolio increases.

PORTFOLIO RISK:

The risk associated with an investment when it is held in combination with other assets, not by
itself. The beta of a portfolio is a weighted average of the betas of the individual securities in the
portfolio. Each beta is then multiplied by the percentage of your total portfolio that the stock
represents. So since we have two stocks, beta of Adamjee is (1.6197*0.5= 0.80985), and IGI
Insurance stock has a beta of 1.2531 that comprises of 50% of the portfolio
(50%*1.2531=0.62655). The total beta is 0.8098+0.62655=1.4364. This portfolio beta indicates
that the securities tend to be more volatile in their price movements than the market taken as a
whole.

REGRESSION:

Technique for determining the statistical relationship between two or more variables where a
change in a dependent variable is associated with, and dependents on, a change in one or more
independent variables.
When running your regression, you are trying to discover whether the coefficients on your
independent variables are really different from 0 (so the independent variables are having a
genuine effect on your dependent variable) or if alternatively any apparent differences from 0 are
just due to random chance. The null (default) hypothesis is always that each independent variable
is having absolutely no effect (has a coefficient of 0) and you are looking for a reason to reject
this theory.

## P, t and standard error

The t statistic is the coefficient divided by its standard error. The standard error is an estimate of
the standard deviation of the coefficient, the amount it varies across cases. It can be thought of
as a measure of the precision with which the regression coefficient is measured. If a coefficient is
large compared to its standard error, then it is probably different from 0.

Coefficients
STOCK ANALYSIS- MAHAM HAIDER BBA 3

In simple or multiple linear regression, the size of the coefficient for each independent variable
gives you the size of the effect that variable is having on your dependent variable, and the sign
on the coefficient (positive or negative) gives you the direction of the effect. In regression with a
single independent variable, the coefficient tells you how much the dependent variable is
expected to increase (if the coefficient is positive) or decrease (if the coefficient is negative)
when that independent variable increases by one. In regression with multiple independent
variables, the coefficient tells you how much the dependent variable is expected to increase when
that independent variable increases by one, holding all the other independent variables constant.
Remember to keep in mind the units which your variables are measured in.

## R-Squared and overall significance of the regression

The R-squared of the regression is the fraction of the variation in your dependent variable that is
accounted for (or predicted by) your independent variables. (In regression with a single
independent variable, it is the same as the square of the correlation between your dependent and
independent variable.) The R-squared is generally of secondary importance, unless your main
concern is using the regression equation to make accurate predictions. The P value tells you how
confident you can be that each individual variable has some correlation with the dependent
variable, which is the important thing.

ANOVA

The Anova is a statistical analysis tool that separates the total variability found within a data set
into two components: random and systematic factors. The random factors do not have any
statistical influence on the given data set, while the systematic factorsd do. The ANOVA test is
used to determine the impact independent variables have on the dependant variable in a
regression analysis.

CONCLUSION:

Adamjee Insurance has a higher beta value and therefore a higher risk, but the average weekly
returns are also higher for Adamjee Insurance. With a higher risk, follows a higher return. But a
number of things can happen that may cause changes;

## i. The risk free rate can change

ii. A stock’s beta can change
iii. Investor’s aversion to risk can change.