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TO WHOMSOEVER IT MAY CONCERN
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DECLARATION
Anagh Rastogi
(Candidate’s name & Signature)
This is to certify that the above project submitted is correct to the best of my
knowledge.
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ACKNOWLEDGEMENT
Every accomplishment requires a lot of efforts, hard work, support and blessings. This
project is no exception. This project would not have been possible without the support
and cooperation of a lot of people.
I am grateful to my project guide Dr. Vidya Sekhri, who provided me her constructive
ideas and advice at every stage of this project. Her expertise helped me a lot in
accomplishing the objectives of the project.
Last but not the least I would like to thank my family and friends for their support and
blessings without which I would not have succeeded.
Thank You,
Anagh Rastogi
(BM-09032)
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TABLE OF CONTENT
1. ABSTRACT 6
2. INTRODUCTION 7
3. LITERATURE REVIEW 8
5. RESEARCH METHODOLOGY 10
9. LIMITATIONS 25
10. CONCLUSION 26
11. BIBLIOGARHY 27
12. ANNEXURE 28
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ABSTRACT
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INTRODUCTION
This dissertation report is all about Beta or Absolute Volatility that how should I
constrain my portfolio's BETA OR ABSOLUTE VOLATILITY in order to achieve
market neutrality?
Market neutrality is a very useful feature, and is well worth pursuing. The value of a
fund to an investor is partly based on the return that it generates, and partly based on
its correlation to the rest of the investor's portfolio. The lower the correlation, the
more valuable it is? But the question is should we just go for beta and correlation or
that other thing which is absolute volatility. In my dissertation report, I have tried my
level best to have an answer to this question.
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LITERATURE REVIEW:
Published studies that have examined Beta and Absolute volatility in the stock market
appear to be limited.
According to Keppler M. (1990) if you ask investors what risk they assume when
buying stocks, they likely will respond, “Losing money.” Modern portfolio theorists
do not, however, define risk as a likelihood of loss, but as volatility, which are
determined using statistical measures of variance such as standard deviation and beta.
While standard deviation is a measure of absolute volatility that shows how much an
investment’s return varies from its average return over time, beta is a measure of
relative volatility that indicates the price variance of an investment compared to the
market as a whole.
Burns P. (2003) suggested that Simulations are performed which shows the
difficulty of actually achieving realized market neutrality. Results suggest that
restrictions on the net value of the fund are particularly ineffective. A negative
correlation that is-market negativity, is proposed as a more reasonable target, both on
theoretical and practical grounds. Random portfolios, portfolios that obey given
constraints but are otherwise unrestricted, prove themselves to be a very effective tool
to study issues such as this.
Cotter, John (2004) suggested that the use of absolute return volatility has many
modeling benefits. Volatility modeling is a key issue for the finance industry from an
academic and practitioner perspective. This is understandable given the importance
that volatility plays in risk management and the development of accurate risk
measures. To illustrate, successful market risk management requires the use of
accurate risk measures such as minimum capital requirements.
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OBJECTIVE OF THE STUDY:
1. Is there any difference between the results given by absolute volatility and
beta of a share?
2. Should we shift from beta to absolute volatility for better understanding the
share and market performance?
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RESEARCH METHODOLOGY:
- Technical Analysis
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What Is the Beta?
In finance, the beta (β) of a stock or portfolio is a number describing the relation of its
returns with that of the financial market as a whole.
In other words, Beta measures a stock's volatility, the degree to which its price
fluctuates in relation to the overall market. In other words, it gives a sense of the
stock's market risk compared to the greater market. Beta is used also to compare a
stock's market risk to that of other stocks. Investment analysts use the Greek letter 'ß'
to represent beta.
Beta = Covariance (stock versus market returns) / Variance of the Stock Market
A beta of 1 indicates that the security's price tends to move with the market. A beta
greater than 1 indicates that the security's price tends to be more volatile than the
market, and a beta less than 1 means it tends to be less volatile than the market. Many
utility stocks have a beta of less than 1, and, conversely, many high-tech NSE/BSE
listed stocks have a beta greater than 1.
Essentially, beta expresses the fundamental tradeoffs between minimizing risk and
maximizing return. Let's give an illustration; Say a company has a beta of 2. This
means it is two times as volatile as the overall market. Let's say we expect the market
to provide a return of 10% on an investment. We would expect the company to return
20%. On the other hand, if the market were to decline and provide a return of -6%,
investors in that company could expect a return of -12% (a loss of 12%). If a stock
had a beta of 0.5, we would expect it to be half as volatile as the market: a market
return of 10% would mean a 5% gain for the company and An asset with a beta of 0
shows, that its price is not at all correlated with the market or in other words a
positive beta means that the asset generally follows the market. A negative beta shows
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that the asset inversely follows the market; the asset generally decreases in value if
the market goes up and vice versa
Beta is one of the most used and misused of the financial ratios. First off, let’s review
what a beta is, then look at how you can use it in a meaningful way.
The beta is a measure of a stock’s price in relation to the rest of the market. In other
words, how does the stock’s price move relative to the overall market?
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Analysis of Common Stock Beta values:
Stocks with a Beta of >1 is more volatile than the stock market.
This commonly includes high-tech stocks. Why? This is because
Beta >1 as technology becomes rapidly advanced, outdated technology is
useless. Many companies are thus wiped out due to out-dated
technology.
This is impossible. A stock can never be 100 times more risky
Beta >100 than the stock market in general. This is because a small change in
The returns of the stock will make the stock price go to $0.
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Few Examples:
Stock Beta = 2
If the market provides a 10% return to ordinary investors, the stock with a Beta of 2
will provide a 20% return (higher risk, higher return!). However, if the market
provides a negative 8% return, then the Stock with a Beta of 2 will provide a -16%
(higher risk, probability of lower returns!).
If the market provides a 10% return to ordinary investors, the stock with a Beta of 0.5
will provide a 5% return (lower risk, lower return!). However, if the market provides
a negative 8% return, then the Stock with a Beta of 2 will provide only a -4% loss,
(lower risk, lower returns!).
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How to Use Beta
Investors can find the best use of the beta ratio in short-term decision-making, where
price volatility is important. If you are planning to buy and sell within a short period,
beta is a good measure of risk.
However, as a single predictor of risk for a long-term investor, the beta has too many
flaws. Careful consideration of a company’s fundamentals will give you a much better
picture of the potential long-term risk.
2. Beta also doesn’t account for changes that are in the works, such as new lines
of business or industry shifts.
3. Beta suggests a stock’s price volatility relative to the whole market, but that
volatility can be upward as well as downward movement. In a sustained
advancing market, a stock that is outperforming the whole market would have
a beta greater than 1.
Here: r = correlation between share and market and the balance σ share / σ market the
absolute volatility.
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The value of A.V, r, Beta of all the companies are given below:
ABSOLUTE
COMPANY S.D OF VARIANCE S.D OF VOLITILITY
SYMBOL SHARE OF SHARE MARKET (A.V) R r2 BETA
(S.D OF
SHARE / S.D
OF
MARKET)
ABB 0.03096 0.000958522 0.02451 1.2630 0.657 0.432 0.830
ACC 0.03061 0.000936972 0.02451 1.2487 0.644 0.414 0.804
AMBUJACEM 0.03383 0.001144469 0.02451 1.3801 0.608 0.369 0.838
AXISBANK 0.04008 0.001606406 0.02451 1.6350 0.771 0.594 1.260
BHEL 0.03008 0.000904806 0.02451 1.2271 0.797 0.636 0.978
BPCL 0.02841 0.000807128 0.02451 1.1590 0.369 0.136 0.428
BHARTIARTL 0.04669 0.002179956 0.02451 1.9047 0.500 0.250 0.953
CAIRN 0.03394 0.001151924 0.02451 1.3846 0.704 0.496 0.975
CIPLA 0.02415 0.000583223 0.02451 0.9852 0.467 0.218 0.460
DLF 0.05525 0.003052563 0.02451 2.2539 0.708 0.502 1.596
GAIL 0.02904 0.000843322 0.02451 1.1847 0.568 0.323 0.673
GRASIM 0.03112 0.000968454 0.02451 1.2695 0.614 0.377 0.780
HCLTECH 0.04411 0.001945692 0.02451 1.7994 0.608 0.370 1.094
HDFCBANK 0.02696 0.000726842 0.02451 1.0998 0.758 0.575 0.834
HEROHONDA 0.02651 0.00070278 0.02451 1.0815 0.514 0.264 0.556
HINDALCO 0.04077 0.001662193 0.02451 1.6632 0.715 0.511 1.189
HINDUNILVR 0.02048 0.00041943 0.02451 0.8355 0.400 0.160 0.334
HDFC 0.03734 0.001394276 0.02451 1.5233 0.762 0.580 1.160
ITC 0.02393 0.000572645 0.02451 0.9762 0.553 0.305 0.539
ICICIBANK 0.04421 0.001954524 0.02451 1.8035 0.826 0.682 1.490
IDEA 0.03686 0.00135866 0.02451 1.5037 0.762 0.580 1.146
INFOSYSTCH 0.02649 0.00070172 0.02451 1.0806 0.632 0.399 0.683
IDFC 0.04541 0.002062068 0.02451 1.8525 0.718 0.515 1.329
JPASSOCIAT 0.05416 0.002933306 0.02451 2.2094 0.769 0.592 1.700
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ABSOLUTE
COMPANY S.D OF VARIANCE S.D OF VOLITILITY
SYMBOL SHARE OF SHARE MARKET (A.V) r r2 BETA
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Following table shows the analysis of above calculated A.V, r and Beta.
HIGH A.V HIGH LOW A.V HIGH A.V LOW LOW A.V LOW
BETA HIGH BETA BETA BETA
TOTAL
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ANALYSIS (Certain Tests)
LOW BETA 16 4
So there are 30 shares of High V.R and High Beta, 0 of Low V.R but High Beta, 16 of
Low Beta but High V.R and finally 4 of Low V.R and Low Beta.
There are many benefits of A.V over the beta. First of all let us see the relation of A.V
with beta.
Crosstabs
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Symmetric Measures
Asymp. Std. Approx. Approx. Exact
Value Error Tb Sig. Sig.
Interval by Pearson's R
.377 .093 2.817 .007c .017
Interval
Ordinal by Spearman
.377 .093 2.817 .007c .017
Ordinal Correlation
N of Valid Cases 50
a. Not assuming the null
hypothesis.
b. Using the asymptotic standard error assuming the null hypothesis.
c. Based on normal approximation.
Chi-Square Tests
Point
Asymp. Sig. Exact Sig. Exact Sig. Probabili
Value df (2-sided) (2-sided) (1-sided) ty
a
Pearson Chi-Square 7.094 1 .008 .017 .017
Continuity
4.522 1 .033
Correctionb
N of Valid Cases 50
a. 2 cells (50.0%) have expected count less than 5. The minimum expected
count is 1.52.
b. Computed only for a 2x2 table
c. The standardized statistic is 2.637.
Degree of freedom=1
Level of significant= 5%
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The Chi-Square Test analysis shows that there is significant relation between A.V
and Beta. Although the factors by which, these two has been calculated are different.
The difference is of correlation (r). But still according to Chi-Square Test analysis
Descriptive Statistics
Std.
Mean Deviation N
BETA 1.037040 .3670012 50
AV 1.548586 .4304356 50
Correlations
BETA AV
Pearson BETA 1.000 .835
Correlation AV .835 1.000
Sig. (1-tailed) BETA . .000
AV .000 .
N BETA 50 50
AV 50 50
Model Summary
Change Statistics
Sig.
F
Mod Adjusted R Std. Error of R Square Cha
el R R Square Square the Estimate Change F Change df1 df2 nge
1 .835a .697 .691 .2039436 .697 110.676 1 48 .000
a. Predictors: (Constant), AV
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Coefficients
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) -.066 .109 -.604 .549
AV .712 .068 .835 10.520 .000
a. Dependent Variable: BETA
This data is of last one year from here if we know the value of A.V for any share we
can easily calculate the value of Beta but main problem with beta is that it is 0.712 *
A.V - 0.066, Now can we take Beta as a true measure of volatility?
For this let us try further with other tests to prove that A.V is better than Beta
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The common thing between A.V and Beta is r:
Now there can be 3 types of r between stock market and a particular share:
Case 1 Case 3
r=1 r<1
Case 2 Case 4
r>1 r ≤ 0.5
Now let us take some examples to prove that A.V is more powerful tool to judge
any shares volatility then Beta.
Than Beta in this case is equal to A.V because r = 1 and Beta = r * A.V, than in this
case what is the use of Beta.
2nd case: Now if, r >1,and A.V is 0.5 or 0.75 or 1 or 1.5 etc.
Than beta in this case will be always more then A.V, means the Beta value is showing
exaggerate value of volatility.
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3rd case: Now if, r<1, A.V is 0.5 or 0.75 or 1 or 1.5 etc.
In this case A.V is saying that volatility of the share is 0.5 or 0.75 or 1 or 1.5 etc. but
due to r is less than 1 (r<1). The value of Beta will be less than of A.V. Here again
beta is telling the misleading output. Although A.V is saying a particular share is of
high volatile but Beta is just the opposite.
4th case: Now if, r ≤ 0.5, A.V is 0.5 or 0.75 or 1 or 1.5 etc.
In this case again r ≤ 0.5, the value of Beta will be just half of the A.V or even less
than the half value of A.V.
Cases Result
Case 2 (r > 1) Beta in this case will be always more then A.V, means the Beta
value is showing exaggerate value of volatility.
Case 3 (r < 1) The value of Beta will be less than of A.V. Here again beta is
telling the misleading output.
Case 4 (r ≤ 0.5) Beta will be just half of the A.V or even less than the half value
of A.V.
Now, Is it a wise decision to check Beta of a particular share and not the A.V and
r.
These findings are based on the assumption that, If Beta is 0.85 then it is a low
beta, otherwise high Beta.
And if A.V is less then 1 then it’s a low A.V, otherwise it is a high A.V.
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LIMITATIONS
1. I have taken 50 nifty shares only it is possible that it may not give the true
picture of total shares in the market.
3. This study is technical analyses study not a fundamental one, so there are
chances that it may not give the correct picture.
4. The test, tool, analysis and recommendations regarding Beta or A.V are truly
personal, it maybe possible that some people don’t agree with this.
5. These findings are based on the assumption that, If Beta is 0.85 then it is a low
beta, otherwise high Beta and if A.V is less then 1 then it’s a low A.V,
otherwise it is a high A.V.
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CONCLUSION
BETA is a measure the check the volatility of a share but when we see its comparison
with the ABSOLUTE VOLATILITY, the result is in front of us. Absolute volatility
is giving much accurate result than Beta. We have seen in Chi-Square Test analysis
that there is significant relationship between Beta and A.V. after proving the
relationship between Beta and A.V; I have proved in Regression test analysis that A.V
is telling the right volatility than Beta, if we know the value of A.V for any share we
can easily calculate the value of Beta but main problem with beta is that it is 0.712 *
A.V - 0.066, Now can we take Beta as a true measure of volatility? Than in the
further analysis when I have taken correlation (r) as a base I have again proved that
the value given by A.V is far more reliable the value given by Beta. There is no end
for this discussion that whether A.V is good or Beta is Better but one thing is clear
from this that A.V is better and reliable than Beta.
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BIBLIOGARHY
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ANNEXURE
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Housing Development
Finance Corporation Ltd. FINANCE – HOUSING HDFC
I T C Ltd. CIGARETTES ITC
ICICI Bank Ltd. BANKS ICICIBANK
TELECOMMUNICATION -
Idea Cellular Ltd. SERVICES IDEA
Infosys Technologies Ltd. COMPUTERS – SOFTWARE INFOSYSTCH
Infrastructure
Development Finance Co.
Ltd. FINANCIAL INSTITUTION IDFC
Jaiprakash Associates Ltd. DIVERSIFIED JPASSOCIAT
Jindal Steel & Power Ltd. STEEL AND STEEL PRODUCTS JINDALSTEL
Larsen & Toubro Ltd. ENGINEERING LT
Mahindra & Mahindra
Ltd. AUTOMOBILES - 4 WHEELERS M&M
Maruti Suzuki India Ltd. AUTOMOBILES - 4 WHEELERS MARUTI
NTPC Ltd. POWER NTPC
Oil & Natural Gas OIL
Corporation Ltd. EXPLORATION/PRODUCTION ONGC
Punjab National Bank BANKS PNB
Ranbaxy Laboratories Ltd. PHARMACEUTICALS RANBAXY
Reliance Capital Ltd. FINANCE RELCAPITAL
Reliance Communications TELECOMMUNICATION -
Ltd. SERVICES RCOM
Reliance Industries Ltd. REFINERIES RELIANCE
Reliance Infrastructure
Ltd. POWER RELINFRA
Reliance Power Ltd. POWER RPOWER
Siemens Ltd. ELECTRICAL EQUIPMENT SIEMENS
State Bank of India BANKS SBIN
Steel Authority of India
Ltd. STEEL AND STEEL PRODUCTS SAIL
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Sterlite Industry Ltd. METALS STER
Sun Pharmaceutical
Industries Ltd. PHARMACEUTICALS SUNPHARMA
Suzlon Energy Ltd. ELECTRICAL EQUIPMENT SUZLON
Tata Consultancy Services
Ltd. COMPUTERS – SOFTWARE TCS
Tata Motors Ltd. AUTOMOBILES - 4 WHEELERS TATAMOTORS
Tata Power Co. Ltd. POWER TATAPOWER
Tata Steel Ltd. STEEL AND STEEL PRODUCTS TATASTEEL
Unitech Ltd. CONSTRUCTION UNITECH
Wipro Ltd. COMPUTERS – SOFTWARE WIPRO
The share price of these 50 shares and market has been collected from
www.nseindia.com from 1 February. 2010 - 31 January. 2011, time duration is one
year.
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