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Title of Assignment:
Case Study 01:
Stock-Price Beta Estimation for the Royal Dutch Petroleum Company

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 Case Study 01: Stock-Price Beta Estimation for the Royal Dutch Petroleum Company

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A. Describe some of the attributes of an ideal risk indicator for stock market investors.
1. S.Nishantha
An ideal measure of stock market risk would be simple to derive, accurate and consistent from
one year to another. With an ideal risk measure, investors are able to control the risk exposure
faced during volatile markets with well-targeted and well-timed investment buy/sell decisions.
For example, suppose an elderly investor wants to maintain an exposure to the equity markets
during retirement, but wants to limit risk to regulate the possibility of devastating losses. With an
ideal risk measure, retired investors could precisely tilt portfolio allocation toward securities with
low risk characteristics. Alternatively, if an investor anticipated a surge in stock prices following
a decline in interest rates, precise risk measures could help such an investor tilt an investment
portfolio toward more volatile stocks. The usefulness of stock market risk indicators diminishes
to the extent that they fail to provide accurate and consistent measures of risk exposure from one
year to another. In fact, an important limitation of risk estimators derived from the CAPM is that
Subject Code:
they vary MN 5227
from one period to another in ways that prove highly unpredictable. When betas vary
Subject: Business Economics
from one year to another in ways that are essentially random and unpredictable, betas fail to
provide investors with a risk assessment tool that can be used to effectively manage portfolio
risk.
Lecturer: Prof. SWSB Dasanayaka

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this assignment.
information over the past year (52 observations) for RD and the S&P 500. Then, enter this
information in a spreadsheet like Table 17.7 and use these data to estimate RD = s beta. Describe
any similarities or dissimilarities between your estimation results and the results depicted in
Figure 17.8

Stock-price beta estimates often vary markedly depending upon the time frame analyzed, and
according to the daily, weekly, monthly, or annual return interval examined. Such differences, if
severe, can undermine the credibility of stock- price betas as useful risk indicators.

According to the 2017-2018 Royal Dutch stock result

beta β = 0.3075
alfa α = 0.02001

Given the old result vs new analyzed result, beta value different is 0.3817. Hence, almost the risk
is same as earlier stage. Both are less risk (1>beta(old value and new value)
However, new value is much safer than the old market and low risk low return. Also, the alfa α is
increased to 0.02 changed as – value (positive)
Inverters may will get positive result.

C. Estimates of stock-price beta are known to vary according to the time frame analyzed; length
of the daily, weekly, monthly, or annual return period; choice of market index; bull or bear
market environment; and other nonmarket risk factors. Explain how such influence can
undermine the usefulness of beta as a risk indicator. Suggest practical solutions.

Empirical estimates of stock-price beta are known to vary according to the time frame analyzed;
length of the daily, weekly, monthly, or annual return period; choice of market index; bull or
bear market environment; and other nonmarket risk factors. For example, estimates of beta tend
to be imperfect risk measures because return volatility for the overall market is very difficult to
measure. On the nightly news, when commentators talk about the market being up or down, they
often refer to moves in the DJIA. Whereas the DJIA offers good insight concerning changes in
the prices of large blue chip companies, it offers little insight concerning volatility in the returns
earned by investors in smaller high-tech stocks. From the perspective of many individual and
institutional investors, the S&P 500 Index gives superior insight concerning moves in the overall
market, but like the DJIA, the S&P 500 is dominated by large blue chip companies. Although the
Nasdaq and Russell 2000 indexes are popular measures of high-tech and smaller stocks, they are
much less informative about changes in the overall market. While there is a high degree of
correlation in rates of return earned on the DJIA, S&P 500, Nasdaq, and Russell 2000 indexes,
slight differences can have big effects on beta estimates.