BETAS

R AV I S R I VA S TA VA
BHUMANYU SINGH
NAMAN JAIN
MARUTHI SABBANI
 WHAT IS BETA?
• a measure of volatility/systematic risk

• where:
• Re=the return on an individual stock
• Rm=the return on the overall market
• Covariance=how changes in a stock’s returns relate to changes in the market’s returns
• Variance=how far the market’s data points spread out from their average value
LIMITATIONS OF BETA

• Beta value of a stock is dependent on historical price movements and history is not always an
accurate predictor of the future
• Less useful for long-term investments, since a stock's volatility can change significantly from
year to year depending upon the company's growth stage and other factors
FUNDAMENTAL BETA

• A measure that helps determine the potential risk of a security using fundamental information
of the company, including market-related and financial data.
UNDERLYING THEORY

• Beta is a normalized measure of systematic risk of a company.

• Systematic risk of a company should have close relation with the fundamentals of that
company.
• We can use regression betas or fundamental betas. However, Rosenberg suggested that
fundamental betas are a better approximation for ex ante beta.
DATA USED

• Collected Historical price(closing) data for NIFTY50 companies (monthly)

• Time Period:- April 2010 to March 2018
• Collected fundamental information for each company during the same period from
moneycontrol
FUNDAMENTALS USED

• Debt to Equity Ratio (Leverage)

• Earnings per Share (Earnings)
• Return on Capital Employed (Profitability)
• Interest Coverage (Solvency)
• Dividend Payout Ratio (Dividend Policy)
METHODOLOGY ADOPTED
Collect data

Calculate Returns

Find regression
betas for each
company

Take averages of
fundamentals

Regress
fundamentals to
regression betas
REGRESSION MODEL
DIAGNOSTIC TESTS

Ramsey Reset test.

Null – Linear model
Our model is linear
NORMALITY OF ERROR TERMS

J B statistics.
Null – Normality.
Normal
HETEROSCEDASTICITY

Volatility of error term is

not constant.
Heteroscedasticity is
present
 Breusch Pagan Test
Null – homoscedasticity
Heteroscedasticity is present
AUTO-CORRELATION

Durbin Watson
Test.
Auto correlation
is not present
MULTI- COLLINEARITY

Variance inflation
Factor
Multi Collinearity is
not presnet
CONCLUSION

• Adjusted R square is negative which means the model is bad. All the betas are insignificant as
well.
• Possible reasons – Omitted variable bias as firm size is not taken as an independent variable.