CF ASSINGMENT(BETA)

COMPANY PRODUCT & GEOGRAPHY BETA COMPUTED USING 1-YR DAILY STOCK
1.21

BETA COMPUTED USING 5-YR WEEKLY STOCK

0.96

Hindalco Ltd Aluminum, Global

Player

HUL FMCG

0.62

0.78 0.88 0.22

Indian Hotel Ltd. Hotels, Global Players 0.89 Jet Airways Ltd. Airline, large
Domestic exposure 0.86

NALCO Ltd. Aluminum, Domestic

Player

0.03

0.39

Linc Pens and Stationary Item, Large 0.49 Plastic ltd. domestic Sale

0.55

Q1. For the same company (Say Jet Airways), what are the reasons for different beta estimates using 1-year data and 5-year data? Explain for all the companies.
The beta coefficient is a key component for the Capital Asset Pricing Model (CAPM), which is used to calculate the cost of equity. The Capital Asset Pricing Model describes the relationship between risk and expected return and that is used in the pricing of risky securities. In the given case the valve of beta changes from 0.86 to 0.22 (for Jet Airways) which indicates that every 1% change in market, Jet Airways is expected to move 0.88% as per one year data and 0.22% as per 5 year data. Hence we can say that Jet Airways has less variation with respect to market or has stable business which has moved value of beta down. This can be possible for several reasons i.e. if Jet Airways has changed its business strategy in this 5 years by merger & acquisition, changing the degree of operation leverage, changing degree of financial leverage or changing business risk. Mathematically as we know beta is depend upon Co-variance of return on equity, return of market and variance of market return. We know that if we take variance of market for one year that will be much less than that of 5 years, so the denominator of Beta equation will be more for 5 years data, which results in less beta value for 5 years data.

ARITRA MANDAL

nmp26aritra_m@mdi.ac.in

26NMP16

CF ASSINGMENT(BETA)
Q2. What are the feasible reasons for such low estimates for NALCO? Would you rely on estimate given? Yes Or No? Discuss
There may be several reasons for low value of beta of NALCO like there may be low expected return from the stock compare to expected market return, the variation of expected market return may be more, change of government policies, mergers or acquisitions of low profitable unit etc.

Q3. What could be the reason for different estimates for the companies mentioned above (say, low value for Hindustan Unilever and the high value for Hindalco)? Is it the Industry? Is it the geographical exposure? Is it something else?
Beta is actually depends upon performance of the sectors if the sectorial growth is steady then company can perform well. In case of HUL, FMCG sector has steady growth and there is always a constant demand in the market considering risk of economic condition. So, as per market perceived notion, investment in FMCG sector is less risky than any other sector like normal manufacturing sector. That is the main reason of having low beta for HUL. As its business risk is lowest considering market growth (around 8-10% in 2007) and high operating and financial leverage lead to stable stock price and low beta. In case of Hindal Co, due to sluggish growth of manufacturing sector, and intensive capital investment risk considering return, there is high chance of failure perception prevails among investors which may lead to a stock price susceptible to market stock price.

Q4. Compute the expected returns for each company if you know that the risk free rate of return at that time was 7.9% and market risk premium was 5.7%
Expected Return= RF + *( RM - RF) Expected Return = RF + Market Risk Premium RF = Risk free return=7.9% Market risk premium=5.7% Risk ARITRA MANDAL 5.70 RF 7.90 26NMP16

nmp26aritra_m@mdi.ac.in

CF ASSINGMENT(BETA)
Premium Company Name Beta Using 1 yr data 1.21 0.62 0.89 Beta Using 5 yr data 0.96 0.78 0.88 Expected return considering 1yr dta 14.80 11.43 12.97 Expected return considering 5- yr dta

Hindal co HUL Indian Hotel Industry Jet Airways NALCO Linc Pens & Plastic

13.37 12.35 12.92

0.86 0.03 0.49

0.22 0.39 0.55

12.80 8.07 10.69

9.15 10.12 11.04

ARITRA MANDAL

nmp26aritra_m@mdi.ac.in

26NMP16