What does beta measure? Security Beta
- Calculation of the weighted average cost of capital Not found: 2018
The resulting calculated value of the beta indicator must be adjusted by a coefficient characterizing the amplitude of fluctuations in the total profitability of shares of companies in this industry - Calculation of discount rate for IFRS impairment Not found: 2018
If this coefficient is greater than 1, then the stock is unstable at beta less than 1 is more stable, which is why conservative investors are primarily interested in this ratio and prefer stocks with a low level of it - Estimating the company-specific risk premium when determining the required return on equity Not found: 2018
Ibbotson Associates 2010 - the average rate for the prepackaged software industry was adopted, consisting of 313 companies in the US capital market source - SBBI ... O was 26.21% However, it should be noted that it would probably be more appropriate to calculate such a premium for the company being valued based on own coefficients risk bet rather than using average group premium estimates for an industry. This approach could lead to... Duff&Phelps market risk for different size groups of companies based on risk indicators such as operating margin coefficient of variation of operating margin coefficient of variation return on equity - Capital asset valuation model as a tool for estimating the discount rate Not found: 2018
As for financial leverage, companies with a high level of this indicator are more exposed to systemic risk for two reasons. Firstly, significant interest payments lead to... Taking into account financial leverage, the beta coefficient is 4 Bi Bu 1 1 - t DE 2 where Bi .. Table 2. Calculation of the weighted average β-coefficient of a diversified company Industry Share of activity β-coefficient Weighted β-coefficient Ferrous metallurgy 0.4 0.5 0.2 Non-ferrous metallurgy - Formation of a multifactorial criterion for assessing the investment attractiveness of an organization Not found: 2018
Table 4. Data for calculating the value of the multifactor evaluation criterion investment attractiveness organization Indicator Evaluation criterion Quadra OGK-2 OGK-5 Product range Degree of product attractiveness 4 3 3 Cost... Financial attractiveness 0.25 0.56 0.80 Beta coefficient Risk level 1.22 1.39 0.82 As of 2012 Substituting these values... About OGK-5 Let's determine the average value of the multi-factor criterion of investment attractiveness of the analyzed companies in the energy industry 5.00 4.63 4.56 3 4.73. As already noted, the average value of the multifactor criterion of investment - Analysis of models for estimating the cost of capital Not found: 2018
Leverless beta for the industry Damodaran 1.03 Borrowed capital thousand rubles 141,663,000 Equity capital thousand... This method is based on the fact that the profitability borrowed money is determined based on the interest coverage ratio In accordance with this indicator, a rating is assigned and the default spread is added, which is added - Investment risk Not found: 2018
The method of analysis of hierarchies allows taking into account the human factor in the preparation of decision making is universal - applicable to various industries serves as a superstructure for other methods designed to solve poorly formalized problems where human ones are more suitable ... Beta coefficient values are determined based on the analysis of retrospective data by the relevant statistical services of companies specializing market... The risk premium is defined as the average annual excess return exceeding the rate of return on government bonds with a maturity of 10 years over a period of observation of 5-10 years and is... RTS, which could serve as this indicator, indicates that in this case the yield changed -85% to 197% b Two - How much is the company's equity Not found: 2018
Excel 2007 automatically calculating cost value equity coefficient beta WACC and at the same time the economic value added EVA The cost of capital by the measure of CAPM ... With a risk-free rate, everything is simple - we take an indicator of income that can be obtained from government securities with a minimum probability of default For example, by ... In the formula we are talking about the average market return and not about an individual company In my opinion, it is inappropriate to use the ROE of an individual organization here ... But in practice, it is better to take the beta of a public company from the same industry with a similar profile and adjust for the ratio of own - Methods for estimating the value of a company in M&A transactions on the example of the takeover of OJSC CONCERN KALINA Not found: 2018
JSC Concern Kalina Indicator Size Note βKLNA beta coefficient for Kalina concern calculated from the regression equation 0.739 Coefficient ... RAT and the average forecast growth rate of the industry in Russia Table 6 shows the calculation of the forecast growth rate of 33.8 billion rubles - Company-Specific Risk Factors When Estimating the Premium for These Risks in Emerging Capital Markets Not found: 2018
BRICS about 18,000 observations before selecting data on company performance indicators, the author obtained the following distribution of premium values for a sample of BRICS public companies... A Damodarana< 20, представлены на рис 5. При этом доля... Факторы отраслевые структура рынка отрасли структура конкурентной среды Применение модели SWOT M E Портера На профессиональный выбор аналитика Источник - Equity Market Line and Cost of Capital Not found: 2018
E rm - expected market return where rd - cost of debt rf - risk-free rate βd - beta coefficient of debt E rm - expected market return If the cost of financial leasing ... Efficiency of tax management and tax optimization of oil industry enterprises Materials of the II International scientific and practical conference in 2 parts Edited by Yu S Rudenko L - Not found: 2018
- Calculation of key financial indicators of business performance Not found: 2018
Beta coefficient Historical market coefficients Based on regression analysis of investment returns relative to market returns Fundamental coefficients ... Accounting coefficients Based on the correlation of the company's accounting profits with those of the market as a whole ... However financial crisis The year 2008 was not without consequences for this giant of the steel industry in Russia All profitability ratios fell sharply
Beta is a measure of risk security in relation to the risk stock market. It reflects the variability of the return of a single security to the return of the market as a whole. Beta is one of the main indicators (along with price-to-earnings ratio, equity capital, debt-to-earnings ratio). own funds and others) that stock analysts consider when choosing securities for investment portfolios. This article explains how to find the beta and use it to calculate the return on a security.
Steps
Beta calculation. Simple Formula
- One or both of these values can be negative; this means that investing in the security or the market (index) as a whole will result in losses. If one of the two exponents is negative, then the beta will be negative.
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Subtract the risk-free rate from the return on the security. If the yield on a security is 7% and the risk-free rate is 2%, then the difference is 5%.
Subtract the risk-free rate from the market (or index) return. If the market return is 8% and the risk-free rate is again 2%, then the difference is 6%.
Divide the value of the first difference by the value of the second. This is the beta, which is expressed as a decimal fraction. For the example above, beta = 5/6=0.833.
Using beta to determine the return on a security
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Find the risk-free rate (described above in Calculating Beta). In this section, we will use the same value - 2%.
Determine the return on the market or index. In this section, we will use the same 8%.
Multiply the beta by the difference between the market return and the risk-free rate. In this section, we will use a beta of 1.5. So: (8 - 2) * 1.5 \u003d 9%.
Add up the result and the risk-free rate. 9+2=11% - this is the expected return on the security.
- The higher the beta value for a security, the higher its expected return. However, the higher the expected return, the higher the riskiness; therefore, before making an investment decision, it is also necessary to analyze other important indicators of securities.
Using charts in Excel to determine beta
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Create three columns with numbers in Excel. The first column will contain the dates. In the second - the price of the index (market). The third is the price of the security for which you want to calculate the beta.
Enter data into the table. Start with an interval of one month. Select a date - for example, at the beginning or end of the month - and enter the appropriate price value for the stock market index (try using the S&P500) and then the price value for the security in question. Enter values for 15 or 30 dates, possibly going back a year or two.
- The longer time period you choose, the more accurate beta calculation will be.
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Create two columns to the right of the price columns. One column for the index return, the other for the security return. Use the Excel formula to determine yield.
First, let's find the return on the stock index. In the second cell of the column for index return, enter "=" (equals sign). Then click on second cell in the column with index prices, enter "-" (minus), click on first cell in the index price column, type "/" (divide sign) and then click on first cell in the index price column. Press "Return" or "Enter."
- Nothing is calculated in the first cell because you need at least two values to calculate the return; so you will start from the second cell.
- To calculate returns, you subtract the old price from the new price and then divide the result by the old price. This gives you an increase or decrease in price (in %) over a given period of time.
- Your formula in the yield column might look something like this: = (B3 -B2)/B2
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Copy the formula to repeat it in all other cells in the index return column. To do this, click on the lower right corner of the cell with the formula and drag it to the end of the column (to last value). This way, Excel will repeat the same formula, but with the appropriate data.
Repeat the same algorithm for calculating the yield of the security in question. After completing the calculations, you will get two columns with returns (in %) for the stock index and the security.
Building a schedule. Highlight all the data in the columns with yield and click on the chart icon in Excel. Select a scatter plot. Name the x-axis as the index you are using (eg S&P500) and the y-axis as the security in question.
Add a trend line to the scatter chart. You can do this by selecting Layout-Trendline or by right-clicking on the chart and selecting Add Trendline. Make sure the equation and R 2 value are plotted.
- Make sure you choose a linear trend and not a polynomial or moving average.
- The display of the equation and the R 2 value on the graph depends on the version of Excel you are using. IN latest versions click Layout and find the R 2 display.
- In older versions of Excel, this can be done by clicking on Layout - Trendline - Advanced Trendline Options and checking the appropriate boxes.
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Find the coefficient at "x" in the trendline equation. Your trend equation will be written in the form: y = βx + a. The coefficient at x is the desired beta coefficient.
Meaning of beta
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Learn how to interpret beta. Beta characterizes the risk of a security (in relation to the stock market as a whole), which is assumed by the investor who owns it. That is why you should compare the return of one security with the return of the index, which is the benchmark. The default index risk is 1. A beta value of less than 1 means that the security is less risky than the index it is being compared against. A beta greater than 1 means that the security is riskier than the index it is being compared against.
- For example, the beta of JIN = 0.5. Compared to the S&P500 (the benchmark), GIN is half as risky. If the S&P falls by 10%, the price of GIN will only tend to fall by 5%.
- As another example, imagine that the FRANK company has a beta of 1.5 (compared to the S&P). If the S&P falls by 10%, then the price of francs is expected to fall by 15% (one and a half times more than the S&P).
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Find the risk free rate. This is the rate of return an investor can expect when investing in safe assets such as US Treasury bills or German government bills. Usually this figure is expressed as a percentage.
Determine the respective returns of the security and the market or index. These figures are also expressed as a percentage. As a rule, the yield is calculated over a period of several months.
The basis of dynamic methods for evaluating investment projects is the principle of discounting cash flows. The basis of the discounting operation is the discount rate. The discount rate is not only a measure of return, but also of risk. The justification for the discount rate is largely determined by the calculation of the beta coefficient. Beta coefficient for calculating the discount rate applied to investments in real assets- this is an indicator calculated for the planned type of operating activity of the enterprise, which will arise as a result of the implementation investment project. It is a measure of market risk, reflecting the variability of the profitability of an enterprise's operating activities in relation to the average market profitability of this type of activity in a country or region.
evaluation of investment projects
dynamic evaluation methods
discount rate
beta coefficient of investment in real assets
1. Rosh J. The value of the company: From the desired to the actual / Julian Roche; per. from English. E.I. Nedbalskaya; scientific ed. P.V. Lebedev. - Minsk: "Grevtsov Publisher", 2008 - 352 p.
2. What is the beta coefficient of a stock // URL: http://www.homearchive.ru/business/in0042.html.
3. Podkopaev O.A. On the issue of the shortcomings of dynamic methods for evaluating investment projects // Uspekhi modern natural science. - 2014. - No. 7. - P. 144–147.
4. Sokolov D. Beta coefficient for a non-tradable company. How to use peer companies? // URL: http://p2ib.ru/beta_coefficient.
As you know, investments are always characterized not only by a certain return, but also by the level of risk corresponding to this return. In this regard, the discount rate is a measure not only of profitability, but also of risk. An approach based on the Return on Assets Model (CAPM) has become widely used in determining the discount rate. According to this model, the return on a financial asset will depend on the risk-free rate, beta, and market return, i.e. the required rate of return (discount rate, opportunity cost) for any type of investment depends on the risk associated with these investments, and is determined by the expression:
Rtot = R0 + R1 = R0 + Rm - R0) * β (1)
● R0 - return on risk-free assets;
● R1 - risk premium;
● Rm - average market rate of return;
● β is a beta coefficient that characterizes the level of systematic risk for an investment project (investment risk measure).
Recall that based on the classical "portfolio" theory, financial assets are inherent risks that can be determined by quantitative methods. First, it is the specific risk of the company's shares. In another way, it is called non-systematic. This risk can be reduced by diversifying the assets in the portfolio. Second, by buying a stock, the investor assumes the risk of the entire system. Systematic risk is a risk that cannot be radically reduced by increasing the number of assets in the portfolio, i.e. diversification method does not "work". With the help of the beta coefficient, just such a non-diversifiable risk is estimated. The beta coefficient describes the relationship between the behavior of a particular asset and the market as a whole. The beta coefficient is needed to determine the discount rate in various fundamental analysis models, including when calculating the fair share price using the discounted cash flow method.
The beta coefficient measures the sensitivity of one variable (for example, the return of a particular stock) to another variable (average market return or portfolio return). The beta factor (beta factor) in the CAPM model used to calculate the discount rate for investments in securities is an indicator calculated for a security or a portfolio of securities. It is a measure of market risk, reflecting the volatility of the return of a security (portfolio) in relation to the return of the portfolio (market) on average (average market portfolio).
The beta coefficient shows the change in the price of a security in comparison with the dynamics of the entire stock market:
● for Standard & Poor's Composite Index 500, the beta coefficient is 1;
● for more volatile stocks, the beta is greater than 1;
● For less volatile stocks, the beta is less than 1.
The economic meaning of the beta coefficient: the higher the beta coefficient of an asset, the higher the risk of investing in this asset. If the beta is greater than one, it means that the security under analysis outperforms the market during times of growth. In conditions of decline, on the contrary, it “pulls” down faster. The higher the beta of an asset, the higher its volatility. So, for example, if the beta coefficient of the shares of the company "LTD" is 1.5, then this means that these shares are 1.5 times more volatile than the "market": if the "market" grows by 10%, then the share of the company in question will grow by 15 %. Conversely, if the "market" falls by 10%, then the stock of this company will fall by 15%.
Cautious investors prefer stocks with low level beta factor. So, for example, if the beta coefficient of RCM shares is 0.5, then this means that these shares are 50% less volatile than the "market": if the "market" rises by 10%, then the stock of the company in question will grow by only 5%. Conversely, if the "market" falls by 10%, then the price stocks will fall only by 5%.
The value of the beta coefficient may change over time. Therefore, its calculation is based on at least 60 monthly income indicators (weekly income is considered acceptable "only if the shares are liquid and are traded every day"). However, this raises many problems. First, a private company may find it difficult to find comparable public companies, especially those with the same equity/leverage ratio. And with a different ratio of equity and debt capital, the recalculation of the beta coefficient may turn out to be erroneous. Secondly, different sources give completely different beta values for both the past and the present. future period. For example, the beta coefficient of IBM in 1999, according to BARRA, was 1.18 / 1.39; according to Bloomberg - 1.16; according to S&P - 1.24; and according to the "ValueLine" - 1.15.
Many sources offer information on betas; the problem is that they contradict each other. The same issues arise with time frames: Should betas be daily, weekly, or monthly? For what period and with what statistical error? Should I make adjustments according to Bayes' theorem? Should special circumstances be taken into account? Should changes be made to reflect the lack of liquidity of certain stocks? What about the changes that happen over time? How to take into account foreign affiliates? Moreover, using a beta coefficient to evaluate the performance of an investment or a company in an acquisition is not always correct. Perhaps the bidder is acquiring a company with a different degree of risk. There may be benefits from the merger by lowering the level of fixed costs in the acquiring company and in the target company. There may be transactions in debt instruments, such as leasing agreements or risk-sharing agreements, or projects that include option terms. The theoretical justifications for the choice of the period for studying the beta coefficient are rather contradictory. On the one hand, if we take data for too short a time period, then the results will be distorted by short-term market factors. For example, “the beta coefficient of Mosenergo shares in May would be negative. After all, when the market fell, the company's papers, on the contrary, grew. Just then someone was actively buying them. Thus, the beta coefficient can vary greatly depending on the selected period. The market is unpredictable for short periods of time, and, on the other hand, the horizon for calculating the beta coefficient should not be too large, since for the Russian financial market characterized by high volatility.
Investments in real assets are associated with the creation of a new or development of an existing operating activity of the enterprise. Recall that the operating activities of the company refers to its core activities. It is operating activities that are the main source of income (obtaining operating profit, EBIT) and Money from a well-functioning enterprise.
Investments in real assets as well as financial investment inherent risks that can be determined by quantitative methods. These risks include: non-systematic (specific to a particular enterprise) and systematic risks (risks inherent in the entire market). First, the specific risk of real investments is the risk of operating activities resulting from the implementation of investments, inherent in a particular enterprise. This risk is also called non-systematic and is largely related to the internal environment of the enterprise. An investor whose interests are, for example, related to the production and sale of furniture, in order to reduce unsystematic risk, can diversify his capital by investing in different companies in the furniture business. Secondly, by choosing an operating activity (for example, the production and sale of furniture), the investor assumes the risk of the entire market (furniture market). Thus, systematic risk (non-diversifiable) is the risk inherent in the entire market. Systematic risks include the risk of changes interest rate, currency risk, inflation risk, political risk. Systematic risks are associated with the economic situation in the country, rising prices for resources, rising inflation, changes in the monetary and credit policy etc. In this regard, the risk that cannot be radically reduced by increasing the number of assets (investments in different companies in the furniture business) in the real investment portfolio is called systematic. Just such a non-diversifiable risk of real investment is estimated using the beta coefficient. In this case, the beta coefficient describes the relationship between the behavior of a particular enterprise and the market as a whole. The beta coefficient adjusts the amount of the market premium, equal to the difference between the average market and risk-free returns, depending on the degree of exposure of the investee to non-diversifiable risks.
Thus, the beta coefficient for calculating the discount rate in relation to investments in real assets is an indicator calculated for the planned type of operating activity of the enterprise, which will arise as a result of the investment project. It is a measure of market risk, reflecting the variability of the profitability of an enterprise's operating activities in relation to the average market profitability of this type of activity in a country or region.
If the beta coefficient of an operating activity is equal to one, then this economic activity has the same amount of systematic risk as the market as a whole.
If the beta coefficient is greater than one, then the operating activity of the company in question is more risky than the same economic activity on average in the market. For example, due to the use by the enterprise of a larger share of borrowed funds in the structure of liabilities than the market average. However, the fundamental concept of the relationship between return and risk says: the higher the risk, the higher the required return. Indeed, the aggressive policy of asset financing, which implies a large share of borrowed funds in the structure of funding sources, indicates a high level financial risk, but allows you to get a greater return on equity due to the effect of financial leverage. At the same time, with deterioration economic situation in the country, interest expenses on raising capital (WACC) will increase due to an increase in interest on loans and borrowings (CC), which will reduce the company's profitability to a greater extent (in particular, return on assets calculated on net income) than the average for the market.
If the coefficient is less than one, then the operating activity of the analyzed enterprise is less risky than the same economic activity on average in the market. For example, due to the firm's use of more equity capital and risk management tools than the market average. Applying a conservative asset financing policy, i.e. the predominance of a large share of equity in the sources of asset financing, reduces the possibility of obtaining higher profitability and limits the pace of development of the enterprise compared to the more risky aggressive model of financing the company's assets, but increases its financial stability. The use of risk management tools (insurance, hedging, factoring, etc.) is associated with additional financial costs and also reduces the ability of the company to obtain high yield for the sake of the economic stability of the company. At the same time, if the economic situation in the country worsens, the profitability of this enterprise will decrease to a lesser extent than the market average.
The beta coefficient can be calculated by statistical methods based on observing the change in the average market return and the return on a particular asset over a sufficiently long period. The expert method for determining the value of the β-coefficient is based on the analysis of the degree of influence of various types of systematic risk on the investment object for subsequent weighted assessment. As indicators of profitability, you can take the return on assets, calculated on net profit. Finding a realistic total risk in relative terms is a laborious and very difficult task for practical implementation using the knowledge of probability theory and mathematical statistics. The calculation of the β-coefficient also requires the availability of statistical data on profitability and risks that affect a particular type of company's operations. Therefore, the model can be applied by entrepreneurs already engaged in business and only for those types of operational activities that they intend to develop or expand. Finding the β-coefficient is not possible for start-up entrepreneurs who open their own business. That is, this method will not be able to be applied by firms that do not have sufficient statistics to calculate their β-coefficient, as well as those that are not able to find an analogue company whose β-coefficient they could use in their own calculations. To determine the discount rate, such companies should use other calculation methods or improve the methodology to suit their needs.
The beta coefficient is calculated as the ratio of the covariance of two variables to the variance of the second variable. Thus, the beta coefficient for the planned profitability of the enterprise's operating activity relative to the average market profitability of this type of activity is the ratio of the covariance of the considered values to the market dispersion, respectively:
● ra - estimated value for which the beta coefficient is calculated: the planned profitability of operating activities that will arise as a result of the implementation of the investment project;
● rp - reference value with which the comparison is made: the average market profitability of the type of activity planned for implementation in the country or region;
● Cov - covariance of estimated and reference value;
● Var - dispersion of the reference value.
In practice, the method of calculating the beta coefficient is also used, based on comparison with the indicators of peer companies. Such companies are firms from the same industry, whose business is as similar as possible to the business of the analyzed company. When calculating the beta coefficient, it is necessary to make a number of adjustments, in particular, for the difference in the capital structure of a company planning to implement an investment project in real assets (or in the structure of project financing sources) and peer companies (the ratio of debt and equity (reserve) capital). If the beta of assets is the variability in the cash flows generated by those assets, then the beta of equity depends on the level of debt in the ownership structure.
Accordingly, the beta coefficient of assets can be mathematically represented as follows:
bAct = bDebt∙wDebt + bAK∙wAK, (3)
● bact - beta of the company's assets;
● bDebt - the beta of the company's debt;
● bAK - beta of the company's share (reserve) capital;
● wDebt - share of debt in the ownership structure;
● wAK - the share of equity (share) capital in the ownership structure.
It should be noted that the higher the company's level of debt, the greater the beta of equity. If the company has a high level of debt, then a significant part of the income will go to creditors, so that the remaining cash flows due to shareholders will fluctuate greatly - their variability will be significantly higher than the dispersion of income. If the level of debt is low, then loan repayments have little effect on what is received by shareholders; variability net income and variability cash flow in favor of the shareholders will be approximately the same.
When calculating the weights of debt and equity, one important point must be taken into account - interest on loans is deducted from profit before income tax is calculated, so the level of debt is adjusted by the value (1-t) , where t is the income tax rate. That is, the debt attracted for financing "costs" somewhat less than its nominal value.
As a result, the formula looks like:
where D and E are the amount of debt and equity, respectively.
It is usually assumed that bDebt = 0, i.e. payments on loans do not depend on general market factors. Although this is not always true (for example, the probability of bankruptcy increases with a crisis in the economy and a corresponding collapse in the market), but in practice this assumption is accepted in most cases.
As such, scholars disagree on how accurate the risk/reward ratio forecast is with the CAPM model; the practical calculation of the beta coefficient seems to be a complex and time-consuming process, but these facts in themselves do not prove the inconsistency of the theory in practice.
Bibliographic link
Podkopaev O.A. METHODS AND APPROACHES TO CALCULATION OF THE BETA COEFFICIENT FOR DETERMINING THE DISCOUNT RATE FOR FINANCIAL AND REAL INVESTMENTS // International Journal of Applied and fundamental research. - 2015. - No. 3-2. – P. 245-249;URL: https://applied-research.ru/ru/article/view?id=6523 (date of access: 02/25/2020). We bring to your attention the journals published by the publishing house "Academy of Natural History" Money management
Good day, readers of the trading blog. beta coefficient shows what level of volatility can be expected from a particular stock. And this is worth knowing if you want to avoid panic selling stocks immediately after buying them. High volatility makes paper as unstable as a wild horse. It takes a long time to practice to subdue it. Scientists have come up with a numerical measure to determine the volatility of a stock - the beta coefficient.
What is a beta factor?
Do you remember the basic rule of trading? The greater the risk, the greater the return. In any case, it can be argued that profits grow with the growth of volatility. So the beta coefficient allows you to evaluate this amount of risk / profitability of the securities you have chosen.
The benchmark is the S&P 500 index, which has a beta of 1. If the stock you select also has a beta of 1, then you bear the same risks as trading the index. The profit will be the same. If the S&P 500 is up 10%, then you can expect the same return from your company.
If, for example, a stock's beta is 0.7, then if the S&P 500 rises by 10%, your profit will be 7%. Accordingly, the risks are reduced. And volatility is also getting lower.
If the beta is greater than 1, say 2, then with the same index growth, your return will be 20%. But be aware of the increased risks. The price can not only rise, but also fall by the same 20%. Moreover, high volatility will force you to set large stop losses.
Well, finally, a stock can have a beta of 0 or even a minus. In the first case, the security moves independently of the S&P 500 index. Its risk/return cannot be measured in this way.
In the second case, when the beta is negative, your risks remain the same (as with a positive coefficient), but the return changes in the opposite direction. For example, if the beta of a stock is -1.5, then if the index rises by 10%, this security will bring its holder -15%.
Conclusions: if you want to earn more, then choose stocks with a beta greater than one, but be prepared for high volatility = risks. All U.S. stock market stocks are linked and directly proportional to the S&P 500. There are a few "exceptions", but my advice is, do not look for papers with beta zero or with minus.
We return to Earth
I anticipate your thoughts because I went through this myself. Why not earn many times more by choosing stocks with the highest beta. We have learned to tame volatility (read). It remains only to practice a little.
I will now list a few points that I have learned from personal practice that make beta just a coefficient that needs to be remembered sometimes.
- Beta was originally designed to compare returns investment funds with the S&P 500. It is clear that at least annual results are being compared. That is, if you selected a security with a coefficient of 2 and hope to cut down a double profit of the index in a few days, then you are mistaken. What you will definitely have is a stock that is more volatile than an index.
- The beta coefficient is calculated based on the past performance of the company. Accordingly, if performance changes in the future, then the beta will not remain the same.
- The beta coefficient shows how the security reacts to the movement of the index. But they do not reflect the strength of the company in its sector and the economy as a whole. That is, the stock with the highest beta is not the best in its industry (at least not necessarily).
beta coefficient rarely used in my practice. I prefer to control volatility using the same ATR. But, it can be successfully used in combination with other tools. This is just my opinion and my position. Experiment for yourself and draw your own conclusions.
Sharpe's model considers the relationship between the return on each security and the return on the market as a whole.
Key assumptions of the Sharpe model:
As profitability securities are accepted mathematical expectation of profitability;
There is some risk-free rate of return, i.e., the yield of a certain security, the risk of which always minimal compared to other securities;
Relationship deviations the return on a security from the risk-free rate of return(Further: security return deviation) from deviations return of the market as a whole from the risk-free rate of return(Further: market return deviation) is described linear regression function ;
The risk of a security is degree of dependence changes in the yield of a security from changes in the yield of the market as a whole;
It is believed that the data past periods used in calculating return and risk fully reflect future return values.
According to Sharpe's model, deviations in security returns are associated with deviations in market returns by a linear regression function of the form:
where is the deviation of the security's yield from the risk-free one;
Deviation of market profitability from risk-free;
Regression coefficients.
The main drawback of the model is the need to predict stock market returns and the risk-free rate of return. The model does not take into account fluctuations in risk-free returns. In addition, with a significant change in the ratio between risk-free returns and stock market returns, the model gives distortions. Thus, the Sharpe model is applicable when considering a large number of securities that describe b about most of the relatively stable stock market.
41. Market risk premium and beta.
Market risk premium- the difference between the expected return of the market portfolio and the risk-free rate.
Beta(beta factor) - indicator calculated for security or portfolio of securities. Is the measure market risk, reflecting the variability profitability security (portfolio) in relation to the portfolio return ( market) on average (average market portfolio). For companies that do not have publicly traded shares, a beta can be calculated based on a comparison with peers. Analogues are taken from the same industry, whose business is as similar as possible to the business of a non-public company. When calculating, it is necessary to make a number of adjustments, in particular, for the difference in the capital structure of the compared companies (debt-to-equity ratio).
Beta coefficient for an asset in a portfolio of securities, or an asset (portfolio) relative to the market is the relation covariances considered quantities to dispersion benchmark portfolio or market, respectively :
where - the estimated value for which the Beta coefficient is calculated: the return of the assessed asset or portfolio, - the reference value with which the comparison is made: the return of the securities portfolio or the market, - covariance estimated and reference value, - dispersion reference value.
Beta is a unit of measure that gives a quantitative relationship between the movement of the price of a given stock and the movement of the stock market as a whole. Not to be confused with change.
The beta coefficient is an indicator of the degree of risk in relation to an investment portfolio or to specific securities; reflects the degree of stability of the price of these shares in comparison with the rest of the stock market; establishes a quantitative relationship between fluctuations in the price of a given share and the price dynamics of the market as a whole. If this coefficient is greater than 1, then the stock is unstable; with a beta coefficient less than 1 - more stable; that is why conservative investors are primarily interested in this ratio and prefer stocks with a low level.