Introduction of the concepts analyzed

Beta
Beta is the systematic risk or the volatility of a stock in comparison to the market. In other
words, it measures the fluctuation in the stocks to the changes in the overall market. Beta 1 refers
that the stocks prices moves with the market. Beta less than 1 refers that the stocks price will be
less volatile than the market. Beta greater than 1 refers that the stocks price will be more volatile
than the market. For example, beta value of stock A is 1.5 which means that stock A is more
volatile than the market. Positive beta indicates that the stock is moving in the same direction as
the market. Negative beta indicates just the opposite. Beta is also a very important factor used in
the Capital Assets Price Model.

Capital Assets Price Model

CAPM model talks about the relationship between risk and expected return and is used to
calculate the required rate of return for any risky asset.
The CAPM formula is
ra = rrf + Ba (rm-rrf)
Where, rrf = rate of return of a risk free stock
rm= markets expected rate of return
Ba= beta of the asset
For our calculations, we have calculated beta, used T-bills of 364 days as risk free rate. For
Nepali market, we calculated markets expected rate of return from the related sub indices i.e for
NIC bank from bankings index, for National Life Insurance from Insurances index, for Chilime
Hydropower from Hydropowers index. In Indian market markets expected return for SBI bank
from Nifty bank, for Tata motors from Nifty auto and for Gail India from Nifty energy.
Standard Deviation and Variance

Standard deviation is used to measure the investment volatility. In other words, it is the statistical
measure that deals with historical volatility. It can also be termed as a measure of risk which tells
that an investment will not meet its expected return in a given time period. A volatile stock
usually has higher standard deviation whereas a stable stock will have lower standard deviation.
The higher the standard deviation, the more dispersed the returns are and the risker is the
investment. (Standard Deviation). Variance is the average of the squared differences from the
mean. (Variance) It is used to determine the risk an investor might take while purchasing a
particular stock.
Correlation
Correlation is computed into correlation coefficient, which ranges between -1 and +1. Perfect
positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up
or down, the other security will move in lockstep, in the same direction. Alternatively, perfect
negative correlation means that if one security moves in either direction the security that is
perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the
movements of the securities are said to have no correlation; they are completely random. Modern
portfolio theory (MPT) emphasizes that investors can diversify away the risk of investment loss
by reducing the correlation between the returns from the select securities in their portfolio. The
goal is to optimize expected return against a certain level of risk. According to the modern
portfolio theorist, investors should measure the correlation coefficients between the returns of
different assets and strategically select assets that are less likely to lose value at the same time. If
two assets returns are perfectly negatively correlated, it is possible to build a riskless portfolio
with a return that is greater than the risk free rate. The smaller the correlation is the greater the
risk reduction potential. If correlation coefficient is +1, no risk reduction is possible.
Co-variance
Covariance measures how two variables move together. It measures whether the two move in the
same direction (a positive covariance) or in opposite directions (a negative covariance). In the
stock market, a strong emphasis is placed on reducing the risk amount taken on for the same
amount of return. When constructing a portfolio, an analyst will select stocks that will work well

together. This usually means that these stocks do not move in the same direction. Covariance can
be used to maximize diversification in a portfolio of assets.

Portfolio Beta
Beta of a portfolio is the weighted sum of the individual asset betas. Portfolio beta describes the
volatility of an individual security portfolio, taken as whole, as measured by the individual stock
betas of the securities making it up. (Portfolio Beta) In other words, portfolio beta is a measure
of portfolio volatility. Portfolio beta of 1 indicates that the portfolio is neither more nor less
volatile than the wider market. Similarly portfolio beta more than 1 indicates more volatility
whereas less than 1 indicates less volatility.

Company
Name

Bet
a

Tata Motors

1.592
4

200

0.125

0.198306351

SBI Bank

1.396
1

175

0.1090000

0.1521749

Gail India

1.078
8

385

0.24100000

0.2599908

NIC asia

1.289

182

0.62300000

0.803047

Chilime
Hydropower

0.538

279

0.17300000

0.093074

National Life
Insurance

0.354
1

385

0.23972603
Portfolio
1606 Beta

0.084886986

Total

No of
Shares

Weight

weight
*Beta

1.5914

From the above table we can see that the portfolio beta is higher than 1 i.e 1.59 which indicates
that this portfolios value fluctuates more than the stock market. In other words, this higher

portfolio beta indicates the stocks that tend to be more volatile in their price movements than the
market taken as a whole.

Bibliography
Portfolio Beta. (n.d.). Retrieved from
http://www.nasdaq.com/investing/glossary/p/portfolio-beta
Standard Deviation. (n.d.). Retrieved from
http://www.investinganswers.com/financial-dictionary/technical-analysis/standarddeviation-4948
Variance. (n.d.). Retrieved from http://www.mathsisfun.com/data/standarddeviation.html
Investopedia