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# Beta

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### Beta

1. 1. BETA It describes the relationship between the stock’s return and the index return.
2. 2. Beta • Beta = + 1 One per cent change in the market index return causes exactly one per cent change in the stock return. It indicates that the stock moves in tandem with the market. The beta for the market portfolio is equal to one. Beta = + 0.5 One percent change in market index return causes 0.5% change in the stock return. The stock is LESS VOLATILE AND RISKY COMPARED TO MARKET.
3. 3. Beta • Beta = + 2.0 One percent change in the market return causes 2% change in the stock return. The STOCK IS MORE VOLATILE AND RISKY. When there is a decline of 10% in the market return the stock with a beta of 2 would give a negative return of 20%. THE STOCK WITH MORE THAN 1 BETA IS CONSIDERED TO BE RISKY.
4. 4. Beta • If beta is more than one, it gives us the indication that the security is more volatile than the market as a whole. • If beta is less than one it indicates that the security is less volatile than the market. Beta (β) = nΣxy – (Σx) (Σy) / n Σx2 – (Σx)2 X = market return Y = security return N= no. of trading days
5. 5. Alpha • It indicates that the stock return is independent of the market return. A positive value of alpha is a healthy sign. Positive alpha values would yield profitable return. • According to the portfolio theory, in a well diversified portfolio the average value of alpha of all stocks turns out to be zero. • Formula Αlpha (α) = Average of security return – β X average of market return
6. 6. Correlation • The correlation co-efficient measures the nature and the extent of relationship between the stock market index return and the stock return in a particular period. • Formula the square of ‘r’ is the co-efficient of determination. It gives the % of variation in the stock’ s return explained by the variation in the market’s return.
7. 7. Correlation • For instance, if it is 0.62, the interpretation is that 62% of variations in stock’s return is explained by the variations in the index return.
8. 8. Characteristic Regression Line (CRL) • CRL is used to measure the expected return from a security. • CRL ER = α + β ( Rm)