1. ESTIMATION OF BETA & IT’S SIGNIFICANCE
STUDY GROUP A9:
SRITAM KUMAR DASH
TAPABRATA BANERJEE
DEBARATI RAY
ANURADHA KUMARI

2. OUTLINES
•
•
•
•
•
•
•
•
Introduction
Theoretical background of the concept
Objectives
Companies Profile
Methodology
Analysis
Conclusion
References

3. INTRODUCTION
• A financial decision typically involves risk. For example, a company that
borrows money faces the risk that interest rates may change, and a
company that builds a new factory faces the risk that product sales may be
lower than expected. These and many other decisions involve future cash
flows that are risky. Investors generally dislike risk, but they are also
unable to avoid it . To make effective financial decisions, managers need to
understand what causes risk, how it should be measured and the effect of
risk on the rate of return required by investors. These issues are discussed
using the framework of portfolio theory, which shows how investors can
maximize the expected return on a portfolio of risky assets for a given level
of risk.

4. THEORETICAL BACK GROUND OF THE CONCEPT
• A portfolio is a grouping of financial assets such as stocks, bonds and cash
equivalents, as well as their mutual fund, exchange-traded fund and closedfund counterparts.
• A portfolio is planned to stabilize the risk of non-performance of various
pools of investment.
• Portfolio Management (PM) guides the investor in a method of selecting
the best available securities that will provide the expected rate of return for
any given degree of risk and also to mitigate (reduce) the risks. It is a
strategic decision which is addressed by the top-level managers.

5. BETA
• In finance, the beta (β) of a stock or portfolio is a number
describing how the return of an asset is predicted by a
benchmark. This benchmark is generally the overall financial
market and is often, estimated via the use of representative
indices. Beta measures systematic risk based on how returns
co-move with the overall market.

6. Interpretations of beta
Value of Beta
• β<0
Interpretations
Asset generally moves in the opposite direction as
compared to the index
•
Movement of the asset is uncorrelated with the
movement of the benchmark
•
Movement of the asset is generally in the same
direction as, but less than the movement of the
benchmark
•
• β=0
•
Movement of the asset is generally in the same
direction as, and about the same amount as the
movement of the benchmark
•
Movement of the asset is generally in the same
direction as, but more than the movement of the
benchmark
• 0<β<1
• β=1
• β>1

7. Interpretations of beta
• β<0
• β=0
• 0<β<1
• β=1
• β>1
• An inverse exchange traded fund or a
short position
• Fixed-yield asset, whose growth is
unrelated to the movement of the stock
market
• Stable, "staple" stock such as a
company that makes soap. Moves in the
same direction as the market at large,
but less susceptible to day-to-day
fluctuation.
• A representative stock, or a stock that is
a strong contributor to the index itself.
• Stocks which are very strongly
influenced by day-to-day market news,
or by the general health of the economy.

8. OBJECTIVE
• The beta or betas that measure risk in models of risk in finance
have two basic characteristics that we need to keep in mind
during estimation.
• The first is that they measure the risk added on to a diversified
portfolio, rather than total risk. Thus, it is entirely possible for
an investment to be high risk, in terms of individual risk, but
to below risk, in terms of market risk.
• The second characteristic that all betas share is that they
measure the relative risk of an asset, and thus are standardized
around one.

9. COMPANY PROFILE
STATE BANK OF INDIA:
• State Bank of India (SBI) is a multinational banking and financial services company
based in India. It is a government-owned corporation with its headquarters in Mumbai,
Maharashtra. As of December 2013, it had assets of US$388 billion and 16,000
branches, including 190 foreign offices, making it the largest banking and financial
services company in India by assets
• SBI is a regional banking behemoth and has 20% market share in deposits and loans
among Indian commercial banks.
• SBI had 14,816 branches in India, as on 31 March 2013, of which 9,851 (66%) were in
Rural and Semi-urban areas. In the financial year 2012-13, its revenue was INR 200,560
Crores (US$ 36.9 billion), out of which domestic operations contributed to 95.35% of
revenue. Similarly, domestic operations contributed to 88.37% of total profits for the
same financial year.

10. INFOSYS LTD:
• Infosys (formerly Infosys Technologies) is an Indian multinational provider of
business consulting, information technology, software engineering and outsourcing
services.
• Infosys is the third-largest India-based IT services company by 2012 revenues, and
the second largest employer of H-1B visa professionals in the United States, as of
2012. On 28 March 2013, its market capitalisation was $30.8 billion, making it
India's sixth largest publicly traded company.
• During July 2003, June 2005 and November 2006, it made secondary ADS issues
of US $294 million, US $1.07 billion and US $ 1.605 billion respectively.
• In December 2012, Infosys transferred the listing of its American Depositary
Shares (ADS) from the NASDAQ to the NYSE.
• The credit rating of the company is A- (given by Standard & Poor's on 13-Dec2013).

11. METHODOLOGY
At first we estimated the risk and return of the two companies.
Then we formed 5 portfolios using the stocks of two
companies and estimated the risk and return of the portfolios.
Beta of the two companies was determined using graphical
analysis.
Minimum risk portfolio was found out using beta portfolio
method.

12. Company
Expected Return
Risk
•SBI
-0.099935723
1.98237
•Infosys
0.198421317
2.235288
•Correlation
-0.050470076

13. Portfolio Risk and Return

14. Beta calculation
Beta for SBI:Beta-1.1266
Beta SBI
y = 1.126x - 0.146
12
10
8
6
4
2
0
-5
-4
-3
-2
-1
0
-2
-4
-6
-8
-10
1
2
3
4
5

15. Beta(Infosys)=0.5361
Beta Infosys
20
y = 0.536x + 0.176
15
10
5
0
-5
-4
-3
-2
-1
0
-5
-10
-15
-20
-25
1
2
3
4
5

16. Portfolio Beta
• Beta(SBI)=1.126591
• Beta(Infy)=0.536067
• W1(Beta(SBI))+W2(Beta(Infy))=1
• W1(1.12659)+W2(0.536067)=1
• We know W1+W2=1
• So Putting W2=1-W1 we get,
• W1=0.785629=79%
• W2=1-W2=0.214371=21%

18. Portfolio Beta
Portfolio Beta
y = 1.002x - 0.078
8
6
4
2
0
-5
-4
-3
-2
-1
0
-2
-4
-6
-8
1
2
3
4
5

19. ANALYSIS
State Bank Of India Stock Risk and return:
• The average return percentage is -0.10 % and the risk
percentage is 1.990369369% with a C.V of -19.83650951.
• SBI witnessing a negative average return, losing on the revenue growth
over the last 5 years and it has lost 3.5% market share to its
competitors. SBI is also missing on targets sets.

20. Infosys Ltd Stock Risk and return
• The average return percentage is 0.198% which is negative
and a risk percentage of 2.235% with a C.V of 11.265.Infosys
had been in loss for more than 2 to 3 consecutive years. But
now with the return of its founder Dr. Naryan Murthy it has
started to rise again and gaining profit and will retain its top
position what it had previously in the IT sector.

21. RISK AND RETURN IN CASE OF THE PORTFOLIO
• Portfolio reduces the effect of risk associated with the individual stocks.
Here the portfolio is prepared by investing 50% of SBI and 50% of
INFOSYS ; portfolio of 40% of SBI and 60 % of INFOSYS; portfolio of
60% of SBI and 40 % of INFOSYS; portfolio of 80% of SBI and 20 % of
INFOSYS; portfolio of 20% of SBI and 80 % of INFOSYS.
• So in this case the 40% of SBI and 60% of INFOSYS shows that it has a
C.V of 19.26% higher than the portfolio of 20 % SBI and 80 % INFOSYS
(13.05%). Always a least C.V is preferred as portfolio. Portfolio doesn’t
fluctuate as like individual assets. The entire risk can’t be eliminated
altogether but the risk of a portfolio would be less as compared to
individual securities risk. So, the 5th portfolio is preferred.

22. BETA FOR SBI STOCK
• The beta value for SBI is 1.12, so
a beta greater than 1 shows that
the stock has high systematic risk
and will on average go up by a
larger percentage than the market
goes up and of course will on
average go down by greater
percentage when the market goes
down.
BETA FOR INFOSYS STOCK
• The beta value for INFOSYS is
0.53 and a beta value of less than
1 show that it has less systematic
risk less than the market and an
expected return less than the
market.

23. PORTFOLIO BETA
• Using the beta of SBI and beta of INFOSYS the portfolio beta
found out which is found out to be 79% of SBI and 21%
INFOSYS stock which is the optimal portfolio where to be
invested which has minimum systematic risk.

24. CONCLUSION
• The present project work has been undertaken to study the risk-return
relationship of individual securities, risk and return relationship of a
portfolio as well as beta. As this project work is done by studying two
individual stocks of Sensex, there is much scope for the
analysis, interpretation and conclusion. When there is higher risk
associated with a stock there is always higher return and when beta is
greater than 1 the stock moves in the same direction as of market. As the
economy fluctuates very badly, the stock prices are affected by these
fluctuations and the market has become so volatile in this situation
investors should be very careful.