1. FINANCIAL MANAGEMENTFINANCIAL MANAGEMENT
Group Member :Group Member :
Mansoor AliMansoor Ali
Essam ImtiazEssam Imtiaz
Taha ShahTaha Shah
Danish basheer.Danish basheer.
INDUS UNIVERSITYINDUS UNIVERSITY

2. BetaBeta
““What Is Beta and How Is ItWhat Is Beta and How Is It
Calculated?”Calculated?”
or….

3. BetaBeta
 Beta with regard to mutual fund investing,Beta with regard to mutual fund investing,
is a measure of a particular fund'sis a measure of a particular fund's
movement (ups and downs) compared to themovement (ups and downs) compared to the
overall market. For reference, the market isoverall market. For reference, the market is
given a beta of 1.00.given a beta of 1.00.
 A “coefficient measuring a stock’s relativeA “coefficient measuring a stock’s relative
volatility”volatility”
 Beta measures a stock’s sensitivity toBeta measures a stock’s sensitivity to
overall market movementsoverall market movements
Source:UBS Warburg Dictionary of Finance and Investment Terms

4. How to Calculate BetaHow to Calculate Beta
Beta =Beta = Covariance(stock price, market index)Covariance(stock price, market index)
Variance(market index)Variance(market index)
**When calculating, you must compare the**When calculating, you must compare the
percent change in the stock price to thepercent change in the stock price to the
percent change in the market index**percent change in the market index**

5. How to Calculate BetaHow to Calculate Beta
 Simple Calculation of BetaSimple Calculation of Beta
through Capital Asset Pricing Model, wethrough Capital Asset Pricing Model, we
can calculate beta:can calculate beta:
Required Rate of Return = Risk free rate ofRequired Rate of Return = Risk free rate of
return + ( Beta X Market premium rate ofreturn + ( Beta X Market premium rate of
return )return )

6. Beta ExampleBeta Example
 If risk free rate is 3% or 0.03, marketIf risk free rate is 3% or 0.03, market
premium rate is 6% or 0.06 and requiredpremium rate is 6% or 0.06 and required
rate of return is 14% or 0.14, then beta israte of return is 14% or 0.14, then beta is
0.14 = 0.03 + Beta X 0.060.14 = 0.03 + Beta X 0.06
0.14 - 0.03 = Beta X 0.060.14 - 0.03 = Beta X 0.06
0.11 / 0.06 = Beta0.11 / 0.06 = Beta
1.83 = Beta1.83 = Beta

7. Beta Co-efficientBeta Co-efficient
 ..Beta coefficient is a measure of sensitivity of a share price to
movement in the market price. It measures systematic risk which
is the risk inherent in the whole financial system. Beta coefficient
is an important input in capital asset pricing model to calculate
required rate of return on a stock. It is the slope of the security
market line.
Beta coefficient is given by the following formulas:
β = Covariance of Market Return with Stock Return / Variance of
Market Return

8. There three parts of betaThere three parts of beta
coefficientcoefficient
1. Beta Zero1. Beta Zero
If there is not any effect of marketIf there is not any effect of market
return changes on any financial asset'sreturn changes on any financial asset's
return changes, it will be beta zero. Forreturn changes, it will be beta zero. For
example, govt. treasury bond has no risk ofexample, govt. treasury bond has no risk of
market changes, these provide us samemarket changes, these provide us same
return.return.

9. 2. Positive Beta:2. Positive Beta:
If any financial asset's return increases or decreasesIf any financial asset's return increases or decreases
due to increasing or decreasing the market return,due to increasing or decreasing the market return,
then this will the positive beta.then this will the positive beta.
3. Negative Beta:3. Negative Beta:
If any financial asset's return decreases due toIf any financial asset's return decreases due to
increasing the market return or opposite relationincreasing the market return or opposite relation
between the both return, then it will be the negativebetween the both return, then it will be the negative
beta.beta.

10. RISK FREE RATE (Rf)RISK FREE RATE (Rf)
 The theoretical rate of return of an investment withThe theoretical rate of return of an investment with
zero risk. The risk-free rate represents the interest anzero risk. The risk-free rate represents the interest an
investor would expect from an absolutely risk-freeinvestor would expect from an absolutely risk-free
investment over a specified period of time.investment over a specified period of time.
 In theory, the risk-free rate is the minimum return anIn theory, the risk-free rate is the minimum return an
investor expects for any investment because he orinvestor expects for any investment because he or
she will not accept additional risk unless theshe will not accept additional risk unless the
potential rate of return is greater than the risk-freepotential rate of return is greater than the risk-free
rate.rate.

11.  In practice, however, the risk-free rate doesIn practice, however, the risk-free rate does
not exist because even the safestnot exist because even the safest
investments carry a very small amount ofinvestments carry a very small amount of
risk. Thus, the interest rate on a three-monthrisk. Thus, the interest rate on a three-month
U.S. Treasury bill is often used as the risk-U.S. Treasury bill is often used as the risk-
free rate.free rate.

12. RETURN ON STOCKRETURN ON STOCK
 Return on stock represents a combination ofReturn on stock represents a combination of
dividends and increases in the stock pricedividends and increases in the stock price
(better known as capital gains).(better known as capital gains).
 Return on Stock: Shareholder Total ReturnReturn on Stock: Shareholder Total Return
= Capital Gains + Dividends= Capital Gains + Dividends