Useful one

1. BETA
It describes the relationship between
the stock’s return and the index
return.

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. 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. 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. 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. 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. 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. Characteristic Regression Line (CRL)
• CRL is used to measure the expected return
from a security.
• CRL
ER = α + β ( Rm)