ICFAI UNIVERSITY

DEHRADUN

Name: Gopal Krishan

IUD No: 0901202792
IBS No: 09BS0002792
Course Code: SLFI501
Course Name: Financial Management
Faculty Name: Sharon Jose
Date: 24th August 2009
Topic of the Assignment: CAPM, beta and
regression analysis of a security.

Student’s Signature
Faculty Signature
CAPM and Regression Analysis of Asian Paints Limited with the
Nifty S&P CNX
For the period 1st August 2008 to 31st July 2009
& 2nd Feb 2009 to 31st July 2009
Objective of project: To test the market risk or non diversifiable risk of Asian Paints and to
do the regression analysis of Asian Paints Ltd. return with the market return.

Model used for testing: Capital Asset Pricing Model.

Time period selected:

1. 1st August 2008 to 31st July 2009 for 1 year beta calculation.

2. 1st Feb 2009 to 31st July 2009 for 6 months beta calculation.

Data collected:

1. Secondary data of the daily close of Asian Paints Ltd to calculate security returns and
daily close of Nifty S&P CNX for market returns from www.nseindia.com

2. Secondary data from Asian Paints official site for dividend declared by the company
for the year 2008-09 to calculate the actual return on the security.

3. T-bill 364 rate and T-bill 182 rate as on 11th August 2009 as risk free returns. Rates
being 4.6372% on 182 days T-bill and 4.5056% on 364 days T-bill.

Explanation:

Risk is distribution of actual returns around an expected return. This is because the investor is
taking high risk he will also expect high returns from his investment made. There are risks
which affect some particular securities only, but market affects much wider across the
section. Therefore, it is the market risk only which is rewarded.

Here comes the need to measure the market risk and the expected return of the security. If we
want to calculate the historical risk, we can just find out the standard deviation of all the
historical returns of the security. That will give us how diversified are the returns from the
average returns and that becomes the measure of the risk. Lower the standard deviation lower
is the risk.

Standard Deviation (σ) =

Similarly we can do the ANOVA for the series. It tells us how much variation is there in the
values from their mean. Higher the variation higher will be the risk and vice versa.

Variation can be calculated as the square of the standard deviation.

Thus Variation= or it is

ANOVA: Single Factor For the period

Aug08 - July09

SUMMARY
Cou Averag Varian
Groups nt Sum e ce
Colum 22.284 0.0924 5.3055
n1 241 79 68 26
Colum 16.853 0.0699 8.4816
n2 241 82 33 13

ANOVA: Single Factor For the period

Feb09 - July09

SUMMARY
Cou Averag Varian
Groups nt Sum e ce
Colum 60.987 0.5040 4.4725
n1 121 73 31 32
Colum 51.880 0.4287 6.9079
n2 121 16 62 96

Here in both the cases variations are very high. But they are lesser as compared to that of the
market. Thus security is less risky as compared to the market.

But if we want to find out the risk of the security with reference to market, we have to do the
regression analysis of the security return and the market return. Where

= Return on the security calculated as x 100 (

Return on market and is calculated as x 100

β = Market risk which is calculated as:

β=

α= -β (

When we use this regression equation formula and find out the regression equation between
the security and the market returns, we get the graph which looks like this.

Annexure 1.1
Annexure 1.2

Here, the regression equations that we get are:

In case of 1 year it is and,

In case of 6 months it is

(In the graph, y is the security return and x is market return)

Calculating β:

For 1st August 2008 to 31st July 2009 β = = 0.205

For 2nd Feb 2009 to 31st July 2009 β = = 0.204

Calculating α:

For 1st August 2008 to 31st July 2009 α = 0.09 – (0.205 x 0.07) = 0.078

For 2nd Feb 2009 to 31st July 2009 α = 0.50 – (0.204 x 0.43) = 0.416

The blue points in the graph represent the market return with the corresponding security.
After finding the regression equations, we find out the expected returns on security as per the
market returns by putting the value of market return in the equation. We get the expected
returns and plotting them in the graph we get the black line which is our regression line for
the daily market returns and corresponding expected returns as per the regression.

Findings:

The beta in both the cases is less than one. When beta is less than one it signifies that the
security is defensive. That means even if there is great change in market, the return on the
security will be affected in a small proportion. And because the beta is very small that is the
risk is very less the expected return on the security will also be small.

The Capital Asset Pricing Model:

CAPM establishes a linear relationship between different betas i.e. risk and the corresponding
required rate of return. Then on this linear relationship we can test the security whether what
we are paying for the security is worth for the return it is giving us.

The required rate of return in CAPM is calculated by:

Where;

Expected or required rate of return on the security

Risk free rate of return (In present case as already mentioned it is the T-bill rate)

Beta of the security

Market return

Risk free return in this case is taken at the T-bill rate because it is considered to be having no
risk at all and for 1 year period, the T-bill 364 rate is taken as on 11 th August 2009, and for 6
months T-bill 182 rate is taken as on 11th August 2009.

Beta for the security has been calculated for both the periods.

Market return means all of the market securities taken together forms a portfolio and return
on that is market return. Market return has been calculated by taking into account of daily
market return fir the period considered. That is if we invest Rs. 100 on 1 st August 2008 in
market, what return will it give us on 31st July 2009 is our market return. Nifty closing rate
has been taken as the measure of market return in this case.

Findings:

The findings are for a period of 1 year between 1st August 2008 and 31st July 2009, the market
has given a return of 7.004% and for the period 2nd Feb 2009 to 31st July 2009, it is 61.28%.
(Annexure: 2.1)

Now, if we take an imaginary series of betas, and find out the required return for those betas,
it will give us a linear equation and a regression line will be formed. This line is called SML,
the security market line.
Annexure 3.1

The blue line above is the SML. That shows us that if the beta increases the required return
also increases.

At the beta 0.205 the expected rate of return is 5.018%.

But if we calculate the actual return the security gave in the one year period

i.e. X 100

Where; dividend declared is Rs. 17.5 per share and the capital appreciation is Rs. 206.95

Thus the actual return on the security is 18.64% which has been denoted by the green triangle
in the graph. Seeing graphically the security is giving us higher return than required thus is it
under priced.

If we just see mathematically, the actual return-the required return gives us a positive value.

18.64 - 5.018 = 13.617% Thus it is under prices security.

Annexure 3.2

At the beta 0.204 that is for the period of 6 months the expected rate of return is 16.204%.

And the actual rate of return given by security is 51.69%. Here we are only considering the
capital value appreciation and not the dividend because dividend is declared only once a year
and 6 months period is a short time. Thus taking only capital value appreciation, the actual
return is 51.69%
Once again the actual rate – the required rate gives us a positive value and thus it is under
priced security. In graph the actual return has been denoted by green triangle which is above
the SML.

References:

1. Corporate finance Theory and practice by Aswath Damodaran.

2. Financial Management ICFAI University Press

3. Investments by Ravi Shukla Financial Department School of Management Syracuse

University