Managerial Economics AssignmentGroup 2, Section - C

ContentsProblem Statement.................................................................................................................................3

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Managerial Economics: Assignment

Presented By:

Group 2 Section CAastha Anand (150103005) Abhi Sunil Kothari (150103006) Achintya Goel (150101006) Deepali Gupta (150101040)Divya Prakash (150102035) Kshiteesh Kolhe (150103080)Rajshekhar Chatetterjee (150101092)Shobhit Agarwal (150103164)

Managerial Economics AssignmentGroup 2, Section - C

What is beta of a company ?...................................................................................................................3

What is the importance of Beta for an investor?.....................................................................................3

How is value of Beta interpreted?...........................................................................................................4

Companies chosen for Beta calculation...................................................................................................4

Calculation of Beta for companies using Regression in SPSS...................................................................5

Analysis....................................................................................................................................................8

References...............................................................................................................................................8

Problem Statement Estimate "Beta" using regression method for any two companies of the same sector in the SENSEX and interpret the results

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Managerial Economics AssignmentGroup 2, Section - C

What is beta of a company?Beta is a measure of the volatility, or the systematic risk, of a security or a portfolio of a company in comparison to the market taken as a whole. So Beta, also known as the Beta Coefficient measures the stock risks relation to the overall market. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. The formulae for calculating CAPM is

Cost of Equity = Risk Free Rate + Beta x Risk Premium

Where,

Risk Free rate is the return investor expects from a completely risk free investment. It should be in the currency cash flow

Risk Premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to induce an individual to hold the risky asset rather than the risk-free asset.

What is the importance of Beta for an investor?

When an investor thinks of investing in a particular stocks, he picks stocks with the highest returns. But there is another element involved, which is, Risk. Risk involved with every stock is of two types:

1) Non-Systematic Risks include risks that are specific to a company or industry. This kind of risk can be eliminated through diversification across sectors and companies. The effect of diversification is that the diversifiable risks of various equities can offset each other.

2) Systematic Risks are those risks that affect the overall stock markets. Systematic risks can’t be mitigated through diversification but can be well understood via an important risk measure called as “BETA”

How is value of Beta interpreted?If Beta = 1: If Beta of the stock is one, then it has the same level of risk as the stock market. Hence, if stock market of say SENSEX rises up by 1%, the stock price will also move up by 1%. If the stock market moves down by 1%, the stock price will also move down by 1%.

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Managerial Economics AssignmentGroup 2, Section - C

If Beta > 1: If the Beta of the stock is greater than one, then it implies higher level of risk and volatility as compared to the stock market. Though the direction of the stock price change will be same, however, the stock price movements will be rather extremes.

If Beta >0 and Beta<1: If the Beta of the stock is less than one and greater than zero, it implies the stock prices will move with the overall market, however, the stock prices will remain less risky and volatile.

Companies chosen for Beta calculation

We have taken two companies from the same sector of Fast Moving Consumer Goods:

1) Hindustan Unilever Limited (HINDUNILVR)

2) Dabur India Limited (DABUR)

Calculation of Beta for companies using Regression in SPSS STEP 1: The 1st step is putting the data of the two companies with their stock price over the last 42 months (January 2012 - August 2015) and also the figures for SENSEX over the same period. We also calculated the percentage change for all months over the last month, which will help us calculate the Beta in subsequent steps.

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Managerial Economics AssignmentGroup 2, Section - C

Step 2: We will be taking the percentage change in stock prices for the two companies for the analysis. In the next step as we apply the regression analysis, here we need to define the dependent and independent variables. The dependent variable is stock price of the companies (HUL or Dabur) and the independent variable is BSE SENSEX INDEX.

DABUR:-

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Managerial Economics AssignmentGroup 2, Section - C

HUL:-

Step 3: The beta value for HUL and DABUR can be seen from the Coefficients table of the generated output, which is 0.749 for DABUR and .664 for HUL

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Managerial Economics AssignmentGroup 2, Section - C

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Managerial Economics AssignmentGroup 2, Section - C

Analysis

DABUR

The regression result obtained for DABUR shows a beta value of .664 which indicates that the beta value is between 0 and 1 and it implies the stock prices will move with the overall market, however, the stock prices will remain less risky and volatile.

So for e.g. if the SENSEX increases by 10%, the stock price for DABUR will increase by only 6.64%. On the other hand SENSEX falls by 10%, the stock price for DABUR will decrease by 6.64%

HINDUSTAN UNILEVER LIMITED

The regression result obtained for HUL shows a beta value of .749 which indicates that the beta value is between 0 and 1 and it implies the stock prices will move with the overall market, however, the stock prices will remain less risky and volatile.

So for e.g. if the SENSEX increases by 10%, the stock price for HUL will increase by only 7.49%. On the other hand SENSEX falls by 10%, the stock price for HUL will decrease by 7.49%

References

http://www.investopedia.com/terms/b/beta.asp

http://www.bseindia.com/indices/IndexArchiveData.aspx

http://www.moneycontrol.com/india/stockpricequote/personal-care/hindustanunilever/HU

http://www.moneycontrol.com/india/stockpricequote/personal-care/daburindia/DI

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