stock is the beta. Betas for individual stocks are determined by simple linear r

Question

stock is the beta. Betas for individual stocks are determined by simple linear regression. The dependent variable is the total return for the individual stock and the independent variable is the total return for the stock market (S&P500;, Dow Jones, NASDAQ, NYSE). The co- efficient of the simple linear regression using these two variables will give you the beta of the stock. Betas greater than 1 indicate the stock is more volatile than the market, and betas less than 1 indicate that the stock is less volatile than the market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock has a beta of 0.4, it is 60% less volatile than the market. Pick a company that you believe had a highly volatile (high beta) or extremely involatile (low beta) stock price during 2017 (1/1/2017 - 12/31/2017) with respect to the S&P500; index. Present your thought process on selecting this company, calculate the beta and interpret its meaning.

Explanation / Answer

Lets take TATA COMMUNICATIONS

1. INTRODUCTION:-

Tata Communications

Tata Group, state governments and promoters (74.99%)

Mobile (CDMA) and broadband

Tata Communications is a leading global provider of telecommunications solutions serving the voice, data and next-generation service needs of carriers, enterprises and consumers across the world.Tata Communications was named "Best Wholesale Carrier" at the World Communications Awards in 2006 and "Best Pan-Asian Wholesale Provider" at the 2006 and 2007 Global Wholesale Telecommunications Awards. It is listed on the Bombay Stock Exchange and the National Stock Exchange of India.

2.  CALCULATION OF ?

Steps involved in calculation of ? are listed below

1. Find BSE historical closing prices and of Tata Communications of five years from finance YAHOO

2. Calculate Return percentages of both.

3. Calculate beta by two methods

4. Using SLOPE method and COVARIANCE between market return and company return to the VARIANCE of market return method.

VARIANCE S&P

COVARIANCE OF ASSETS TO BENCHMARK(S&P)

OR

BETA=SLOPE(COLUMNS CONTAINING TATA COMMUNICATIONS RETURNS,COLUMNS CONTAINING S&P RETURNS)

FOR RETURNS:-

Calculate return based on the formula
Return = (Pi ? Pi ? 1)/Pi ? 1
Where Pi = current price of i th month
Pi -1= Closing price in previous month

SO BETA=1.226711

3. Interpretation of beta:

Tata Communications

Tata Group, state governments and promoters (74.99%)

Mobile (CDMA) and broadband

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