Following data give the market return and the Sun Company Scrip's Return for a particular period.

Index Return (Rm)

Scrip Return (Ri)
0.50
0.30
0.60
0.60
0.50
0.40
0.60
0.50
0.80
0.60
0.50
0.30
0.80
0.70
0.40
0.50
0.70
0.60
a) What is the Beta Value of the Sun Company Scrip?
b) If the market return is 2, what would be the scrip return?
Solution:
The Beta Value can be obtained by using the simple leaset square technique.
Ri =
i + Bi + ei
S. No.
1
2
3
4
5
6
7
8
9

Rm =

Index Return (Rm)

0.50
0.60
0.50
0.60
0.80
0.50
0.80
0.40
0.70
5.40
0.60

Rm - Rm
-0.10
0.00
-0.10
0.00
0.20
-0.10
0.20
-0.20
0.10
0.00

(Rm - Rm) 2
0.01
0.00
0.01
0.00
0.04
0.01
0.04
0.04
0.01
0.16
R=

or a particular period.

Scrip Return (Ri)

0.30
0.60
0.40
0.50
0.60
0.30
0.70
0.50
0.60
4.50
0.50

Ri - Ri
-0.20
0.10
-0.10
0.00
0.10
-0.20
0.20
0.00
0.10
0.00

(Ri - Ri)2
0.04
0.01
0.01
0.00
0.01
0.04
0.04
0.00
0.01
0.16

(Rm - Rm) * (Ri - Ri)

0.02
0.00
0.01
0.00
0.02
0.02
0.04
0.00
0.01
0.12

Problem
The average market prices and dividend per share of Asian CERC Ltd. For the past 6 years are given below:

S.No.

Year

1
2
3
4
5
6

2002
2003
2004
2005
2006
2007

S.No.

Year

1
2
3
4
5
6

2002
2003
2004
2005
2006
2007

Average
Dividen
Market
per share
Price
(Rs.)
(Rs.)
38
1.8
45
2
53
2.5
50
2
61
2.6
68
3

Average
Market
Price
(Rs.)
38
45
53
50
61
68

Catial
Gain
(Rs.)
7
8
-3
11
7

Average Rate of Return =

=

Dividen
Catial
Dvividen Rate of
per share
Gain (%)
Yield (%) Return
(Rs.)
18.42%
17.78%
-5.66%
22.00%
11.48%

85.85% /5
17.17%

1.8
2
2.5
2
2.6
3

4.74%
4.44%
4.72%
4.00%
4.26%
4.41%

22.87%
22.49%
-1.66%
26.26%
15.89%
85.85%

years are given below:

Problem:
Given below are the returns on IBM and BSE Sensex for a five year period.
Calculate Beta, Alpha Residual Variance and Correlation:
Return
on BSE
Year
Return on IBM (Y)
Sensex
(X)
1
0.2
0.1
2
0.3
0.2
3
0.5
0.3
4
0.4
0.4
0.6
0.5
5
Solution:

Year

Return on BSE
Sensex (X)

1
2
3
4
5

0.10
0.20
0.30
0.40
0.50
1.50

Return
on IBM
(Y)
0.20
0.30
0.50
0.40
0.60
2.00

X =
Y =
Calculation of Beta
B slpe of the Regression Line is given by
n XY - (X) (Y)
B =
nX2 - (X)2
=
(5 x .69) - (1.5 x 2)
(5 x .55) - (1.50)2
=

3.45 - 3
2.75-2.25

0.9

Calculation of Alpha

0.3
0.4

XY

X2

Y2

0.02
0.06
0.15
0.16
0.30
0.69

0.01
0.04
0.09
0.16
0.25
0.55

0.04
0.09
0.25
0.16
0.36
0.90

Calculation of Residual Variance

e2 =

Y2 - Alpha Y - B XY
n

Calculation of Correlation Coefficient:

XY

r =

x2*Y2
=

0.69
0.55 * 0.90

0.982

Coefficient of Determination
=
=
=

r2
(0.982)2
0.964

Variance of IBM
Y=

Y
n

2
5

Return on IBM (Y)

0.20
0.30
0.50
0.40
0.60

dy
-0.20
-0.10
0.10
0.00
0.20
0.00

dy2
0.04
0.01
0.01
0.00
0.04
0.10

Variance =
SD

0.1/5

=
=

Explained Systematic Variance =

0.02 * 0.964
Un Explained or Residual or Unsystematic Variance

0.4

0.02
0.141

=
=

0.01928
0.00072

Total Variance
Coefficient of Correlation

0.02

Covariance
SD of X * SD of Y

Problem
Date
5-Oct
6-Oct
7-Oct
8-Oct
9-Oct
12-Oct
13-Oct
14-Oct
15-Oct
16-Oct

NSE Index (X)

904.95
845.75
874.25
847.95
849.10
835.80
816.75
843.55
835.55
839.50

Bajaj Auto (Y)

597.80
570.80
582.95
559.85
554.60
545.10
519.15
560.70
560.95
597.40

S. No.

Date

NSE Index (X)

Index Return
(Rm)

1
2
3
4
5
6
7
8
9

5-Oct
6-Oct
7-Oct
8-Oct
9-Oct
12-Oct
13-Oct
14-Oct
15-Oct
16-Oct

904.95
845.75
874.25
847.95
849.10
835.80
816.75
843.55
835.55
839.50
8493.15

-6.54%
3.37%
-3.01%
0.14%
-1.57%
-2.28%
3.28%
-0.95%
0.47%
-7.08%

597.80
570.80
582.95
559.85
554.60
545.10
519.15
560.70
560.95
597.40
5649.30

-4.52%
2.13%
-3.96%
-0.94%
-1.71%
-4.76%
8.00%
0.04%
6.50%
0.78%

Rm =

-0.787%

Ri =

0.087%

Solution
Bajaj Auto (Y)

Bajaj Auto
Return (Ri)

(Ri)2

XY
1502.75
1416.44
1457.25
1407.73
1403.69
1380.87
1335.83
1404.36
1396.49
1436.97
14142.39

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.919636996
R Square
0.845732205
Adjusted R Square
0.828591339
Standard Error 0.062299983
Observations
11
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

SS
MS
F
Significance F
1 0.191503 0.191503 49.34011 6.16E-05
9 0.034932 0.003881
10 0.226435

Coefficients Standard Error t Stat

P-value Lower 95% Upper 95%Lower 95.0%
-0.02834903 0.019106
-1.4838 0.172015 -0.07157 0.014871 -0.07157
2.21088318 0.31475 7.024252 6.16E-05 1.498869 2.922897 1.498869

Upper 95.0%
0.014871065
2.922897152

Problem

Month - Year

BSE Sensex (X)

DLF (Y)

Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11

17558.71
16944.63
17700.9
17868.29
17971.12
20069.12
20032.34
19521.25
20509.09
18327.76
17823.4
19445.22

311.25
276.35
288.2
301.3
301.75
377.3
350.1
307.25
291.95
223.9
212.05
267.2

Index Return
(Rm)

Solution in Direct Method

S. No.

Month - Year

BSE Sensex (X)

1
2
3
4
5
6
7
8
9
10
11

Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11

17558.71
16944.63
17700.9
17868.29
17971.12
20069.12
20032.34
19521.25
20509.09
18327.76
17823.4
19445.22

Beta =

DLF (Y)
311.25
276.35
288.2
301.3
301.75
377.3
350.1
307.25
291.95
223.9
212.05
267.2

186503.21

-3.50%
4.46%
0.95%
0.58%
11.67%
-0.18%
-2.55%
5.06%
-10.64%
-2.75%
9.10%
12.20%

3029.35

Rm =

1.109%

Ri =

n Rm*Ri -- (Rm) * (Ri)

n Rm 2 -- (Rm)2
=
=
Solution in Indirect Method:
The Beta Value can be obtained by using the simple leaset square technique.
Ri =
i + Bi + ei

S. No.
1
2
3
4
5
6
7
8
9
10
11

Rm =

Index Return (Rm)

-3.50%
4.46%
0.95%
0.58%
11.67%
-0.18%
-2.55%
5.06%
-10.64%
-2.75%
9.10%
12.20%

Rm - Rm
-4.61%
3.35%
-0.16%
-0.53%
10.57%
-1.29%
-3.66%
3.95%
-11.74%
-3.86%
7.99%
0.00%

(Rm - Rm) 2
0.21%
0.11%
0.00%
0.00%
1.12%
0.02%
0.13%
0.16%
1.38%
0.15%
0.64%
3.92%

Scrip Return (Ri)

-11.21%
4.29%
4.55%
0.15%
25.04%
-7.21%
-12.24%
-4.98%
-23.31%
-5.29%
26.01%
-4.21%

R=

-0.383%

1.11%

Beta =

(Rm - Rm) * (Ri - Ri)

(Rm - Rm) 2

=
=

8.66 / 3.92
2.21

Calculation of Alpha:
=

Beta (Rm - Rm)

Ri - (-0.383)
Ri + 0.383
Ri
Ri

=
=
=
=

2.21 (Rm - 1.11)

2.21 Rm - 2.45
2.21 Rm - 2.45 - 0.383
2.21 Rm - 2.833

Ri

-2.833 + 2.21 Rm

Ri - Ri

Hence,

Alpha
Beta

=
=

-2.833
2.21

GM - Rm
-0.034972956
0.044631839
0.009456581
0.005754888
0.116742863
-0.001832666
-0.025513245
0.050603317
-0.10635918
-0.027518911
0.090993862

GM - Ri
-0.112128514
0.042880405
0.045454545
0.001493528
0.250372825
-0.072091174
-0.122393602
-0.049796583
-0.233087858
-0.052925413
0.26008017

0.383

Bajaj Auto
Return (Ri)

(Rm)2

Rm * Ri

-11.21%
4.29%
4.55%
0.15%
25.04%
-7.21%
-12.24%
-4.98%
-23.31%
-5.29%
26.01%
-4.21%

12.23%
19.92%
0.89%
0.33%
136.29%
0.03%
6.51%
25.61%
113.12%
7.57%
82.80%
405.31%

39.21%
19.14%
4.30%
0.09%
292.29%
1.32%
31.23%
-25.20%
247.91%
14.56%
236.66%
861.51%

-0.383%
(11 * 861.51) - (12.2 * -4.21)
(11 * 405.31) - (12.2)2
9527.972
4309.57
2.21

-0.034972956
0.044631839
0.009456581
0.005754888
0.116742863
-0.001832666
-0.025513245
0.050603317
-0.10635918
-0.027518911
0.090993862

Ri - Ri
-0.11
0.05
0.05
0.01
0.25
-0.07
-0.12
-0.05
-0.23
-0.05
0.26
0.00

Slope

m - 2.45 - 0.383

33 + 2.21 Rm

(Ri - Ri)2
1.17%
0.22%
0.24%
0.00%
6.46%
0.47%
1.41%
0.21%
5.26%
0.24%
6.96%
22.64%

0.383

(Rm - Rm) * (Ri - Ri)

0.50%
0.16%
-0.01%
0.00%
2.69%
0.09%
0.43%
-0.18%
2.69%
0.19%
2.11%
8.66%

-3.50
4.46
0.95
0.58
11.67
-0.18
-2.55
5.06
-10.64
-2.75
9.10

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.587161905
R Square
0.344759103
Adjusted R Square
0.271954559
Standard Error
9.370760328
Observations
11
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

SS
MS
F
Significance F
1 415.8215 415.8215 4.735406 0.057539
9 790.3003 87.81115
10 1206.122

Coefficients Standard Error t Stat

P-value Lower 95% Upper 95%
9.412387698 3.188327 2.95214 0.016165 2.199891 16.62488
0.32865925 0.151031 2.176099 0.057539
-0.013 0.670316

Lower 95.0%
Upper 95.0%
2.199891 16.62488
-0.013 0.670316

Following data give the market return and the Sun Company Scrip's Return for a particular period.
Index Return (Rm)
Scrip Return (Ri)
4.00
3.00
14.30
18.20
19.00
9.10
-14.70
-6.00
-26.50
15.30
37.20
33.10
23.80
6.10
-7.20
3.20
6.60
14.80
20.50
24.10
30.60
18.00
107.60
138.90
a) What is the Beta Value of the Sun Company Scrip?
b) If the market return is 25, what would be the scrip return?
Solution:
The Beta Value can be obtained by using the simple leaset square technique.
Ri =
i + Bi + ei
S. No.
1
2
3
4
5
6
7
8
9
10
11

Index Return (Rm)

4.00
14.30
19.00
-14.70
-26.50
37.20
23.80
-7.20
6.60
20.50
30.60
107.60

Rm =

Rm - Rm
-5.78
4.52
9.22
-24.48
-36.28
27.42
14.02
-16.98
-3.18
10.72
20.82
0.00

9.78

Beta =

(Rm - Rm) 2
33.43
20.41
84.97
599.36
1316.37
751.76
196.51
288.38
10.12
114.88
433.40
3849.60
R=

(Ri-Ri)(Rm-Rm)

1265.21

(Rm-Rm)2

3849.60

Calculation of Alpha:
Ri - Ri

Ri - (12.63)
Ri - 12.63
Ri
Ri

215
315
25
340
125

Ri
Hence,

Beta =
=

Alpha
Beta

Covar(Range of Scrip, Range of Index)

Varp (Range of Index)
115.0186777
349.9633058

0.32865925
OR

Slope(Range of Scrip, Range of Index)

0.32865925

Alpha =
=

Intercept(Range of Scrip, Range of Index)

9.41

or a particular period.

Beta =

Covariance(range of individual stock return, market return/variance ( range of market ret

115.0186777
349.9633058
0

Scrip Return (Ri)

3.00
18.20
9.10
-6.00
15.30
33.10
6.10
3.20
14.80
24.10
18.00
138.90

Ri - Ri
-9.63
5.57
-3.53
-18.63
2.67
20.47
-6.53
-9.43
2.17
11.47
5.37
0.00

12.63

0.32865925

Beta (Rm - Rm)

(Ri - Ri)2
92.68
31.06
12.44
346.98
7.14
419.13
42.61
88.87
4.72
131.62
28.87
1206.12

(Rm - Rm) * (Ri - Ri)

55.66
25.18
-32.52
456.03
-96.97
561.32
-91.50
160.09
-6.91
122.97
111.85
1265.21

=
=
=
=
=
=
=

f Scrip, Range of Index)

f Scrip, Range of Index)

ge of Scrip, Range of Index)

0.32865925 (Rm - 9.78)

0.32865925Rm - 3.214287467
12.63+0.32865925Rm - 3.214287467
9.415712533 + 0.32865925 Rm
9.415712533 + 0.32865925 Rm
9.41
0.328

rn/variance ( range of market return)

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.637124
R Square
0.405927
Adjusted R Square
0.331668
Standard Error5.48899
Observations
10
ANOVA
df
Regression
Residual
Total

SS
MS
F
Significance F
1 164.6963 164.6963 5.466369 0.047562
8 241.0321 30.12901
9 405.7284

Coefficients
Standard Error t Stat
P-value Lower 95% Upper 95%Lower 95.0%
Upper 95.0%
Intercept 1.201222 2.074646 0.579001 0.578522 -3.58292 5.985364 -3.58292 5.985364
X Variable 1 0.40438 0.172958 2.338027 0.047562 0.005539 0.803222 0.005539 0.803222

Upper 95.0%

Following data give the market return and the Sun Company Scrip's Return for a particular period.
Index Return (Rm)

Scrip Return (Ri)

9.88
2.28
10.31
-3.91
9.21
7.82
-10.00
-0.71
12.20
28.62

4.54
3.13
9.09
-8.86
11.86
6.95
-5.80
2.45
10.66
4.56

Beta =
=

Covar(Range of Scrip, Range of Index)

Varp (Range of Index)
40.72808
100.7173

0.404380181
OR

=
=

Alpha =
=

Slope(Range of Scrip, Range of Index)

0.404380181

Intercept(Range of Scrip, Range of Index)

1.20

eturn for a particular period.