Beta Risk Estimation In Stocks

Abstract

The purpose of this study is to estimate the Beta Risk Coefficient of 15 shares, which are included in the FTSE index. The risk evaluation when dealing with stocks is a very important factor, which should be taken into consideration from the inventor for the following reason: The profitability of a stock goes together with the risk of an adverse movement of the stock value. So, if the investor wants to plausibly expect high returns on his stock, he has to reckon with a high degree of risk. And inversely, high-risk stocks are the only ones promising high returns on the stock. This is the way, by which a stock exchange market works, and it cannot, by logical necessity, work in any other way. Now, given the closed positive relationship between high returns and high risk, the question rises whether the risk associated to a stock can be predicted, so that the investor is in a position to have an estimate of this undertaken risk. For this purpose various methods have been developed, some of them being of heuristic nature (technical analysis, evaluation of external information, study of the balance-sheet of the company involved etc.), other being of probabilistic and/or of statistical nature. Between the latter we can mention the most popular ones, namely the market index model (or simply the market model) due to Sharpe (1963), which postulates a linear relationship between the return on a stock and the return on the market, and can be used to decompose total risk into diversifiable and non-diversifiable risk-components, and the capital asset pricing model (CAPM), which is rather a model of assets pricing, was developed by Sharpe (1963) and Lintner (1965).