Beta Estimation

Investors typically use beta to evaluate investment risk in a certain stock.

Investment Analysts commonly use changes in the value of the KLCI Index or
some other broad stock index to measure market returns.

To estimate the beta, we use linear regression and slope tool to measure it on
Microsoft Excel to ensure that get an accurate result. So, we gather historical weekly
data (25/4/16-26/4/21) about adjustment close price to measure of the Inari and
market returns for the trailing twelve months (TTM) and 5 years trailing data; on
Inari stock and the FTSE Bursa Malaysia KLCI Index (FBMKLCI) to see how they relate
to each other.

0.1 0.25
0.2
0.05
0.15
0.1
0
-0.06 f(x)
-0.04 -0.02 Beta f(x)
0.05= 0.82 x − 0
= 0.09 x − 0.020 0.02 0.04
Linear (Beta)
Beta
-0.05 0 Linear (Beta)
-0.1 -0.05-0.05 0 0.05 0.1 0.15
-0.1 -0.1
-0.15
-0.15
-0.2

Graph 1: Inari’ Beta Estimation in TTM Graph 2: Inari’ Beta Estimation in Trailing 5 Years
•

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 • Graph 1& 2 depicts the Inari’s Beta for TTM is 0.0945 and Beta for trailing 5 Years is 0.8213 respectively.
• We conclude that Inari’s Beta Estimate is positive which indicates that the Inari stock returns move in the
same direction with the FBMKLCI market index.
• On average TTM, the beta of the stock Inari is 0.094, which means if the FBMKLCI market moves up or
down by 1%, Inari stock price will show an increase or decrease of only 0.094%. On average trailing 5
years, beta stock in Inari is 0.8214; that is to say that the stock price of Inari will increase or decline only by
0.8214% if the FBMKLCI market is up or down by 1 %. Therefore, Inari considers lower beta and less
volatile in the FBMKCI market.
• Inari’s Beta less than 1.0 considers less risky than average stock and less responsive to changing returns in
the FBMKLCI market.
• In general, many financial institutions provide several references of the company’s beta, but they can
sometimes be imprecise. For instance, TA Securities make a research report on estimates the Inari’s beta is
0.9. As investment analysts, we should know the exact time horizon of the beta company and we are going
to be much more flexible to calculate the desired time-period horizon.

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 Cost of Equity
The cost of equity is the rate of return paid to shareholders by a company. A company uses cost of equity to assess the
relative investment's attractiveness, both internally and externally.

The investment analyst usually involved in modelling financing and reporting on research, uses cost of equity to assess their
companies and then informs them whether or not the stock is above or below value, and then makes an investment choice.
Capital Asset Pricing Model (CAPM) can be used to calculate the costs of equity ( K e ). The formula is:
K e =r f + β ( r f −r m )
Where:
Ke Expected return on a particular security, portfolio, stock, etc.
rf Expected risk-free rate (usually the 90-day Malaysia Treasury bills)
rm Expected return of the market (usually the KLCI market)

¿¿ Market Risk Premium

We decided to calculate the cost of equity in 5 years average start from 25/4/16 to 24/6/21. Assume that the 90-day
Malaysia Treasury Bills’ rate is 1.77% at trading date of 24/6/21 obtained from BNM, the expected return of the market is
calculated which 1.3946%. The beta of Inari Amertron Bhd is 0.8213. So, the cost of the equity is

K e =1.77 % +0.8213 ( 1.77 %−1.3946 % )

K e =2.0784 %
As a result, Inari with lower beta sees the lower cost of equity. It makes sense because investors cannot be compensated for
greater volatility risk with a higher return.

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