Wednesday, September 28, 2011

EMFPS: How Can We Obtain “Beta” to Analyze CAPM? (CON)




Referring to my previous article of "EMFPS: How Can We Obtain “Beta” to Analyze CAPM?" on link: http://emfps.blogspot.com/2011/09/emfps-how-can-we-obtain-beta-to-analyze.htmllet me explain you the next steps by an example as follows:

1) Without any dividends:
Assume the data of Company “M” from Jan 3, 2005 to Dec 1, 2010 is below cited:

Date
Open
High
Low
Close
Avg Vol
ADj Close*
Jan 3, 2005
4.74
4.92
4.7
4.88
792,600
    4.21
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
 Dec 1,           2010
 5.74
  6.52
 5.74
 6.23
4,193,000
    6.23

The data of the related Stock Index of the company is as follows:


Date
Open
High
Low
Close
Avg Vol
Adj Close*
Jan 3, 2005
907.02
940.94
897.13
916.27
54,441,400
916.27
--------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Dec 1, 2010
1,482.69
1,529.95
1,477.57
1,518.91
141,888,300
1,518.91

-To calculate the return rate for both Company and Stock Index, we can use below formula because there is not any dividends:
Ra = (Pt – Pt-1) / Pt-1
Ra = the return rate for Stock Index and Company
P t-1 = Close price on Jan 3, 2005
Pt = Close price in the next month
-On excel spreadsheet, calculate one cell by using of above formula and copy on all cells related to next months until Dec 1, 2010.
-Now, you have all rate of return for each month (Company and Stock Index). Calculate the average for Stock Index only
-Multiply the average of Stock Index by 12 to obtain the rate of return annually (Rm) which is utilized to analyze CAPM
-Use from excel formula to calculate covariance of the return rate for both Company and Stock Index:    =COVAR (Array1, Array2)
 Where:
Array 1 = all return rate of Company
Array 2 = all return rate of Stock Index
-Use from excel formula to variance of return rate for Stock Index:  
= VAR (number1, [number2]…..)
-Calculate the Beta of Company: COVAR (Ri,Rm) / VAR (Rm)
According to my spreadsheet, I obtained the Beta to be equal 1.501137


2) With dividends:
Now, we assume that the company had paid the dividends as follows:
Date
    Dividends

17-Jan-07
                                                          0.05
27-Jul-
07
0.05
29-Oct-08
0.25
29-Jul-09
0.05
28-Jul-10
0.11

We should look at the date of dividend and improve the company’s return rate accordingly on our spreadsheet by using of below formula:
Ra = [D + (Pt – Pt-1)] / Pt-1
Where:
Ra = the return rate of Company
D = dividend
Pt = Close price for month after dividend date
Pt-1 = Close price for month before dividend date
I calculate the Beta of the Company which is equal to 1.499519


Why are they approximately the same (without and with dividend)?
Because when the company paid the dividend accordingly its share price fell down which shows us the dividend policy of the company. I can say to you this dividend policy is not wrong because the Beta of with dividend is not more than the beta of without dividend.

Conclusion
As the result of this article, I would like to compare the market return of this company with historical market return of the world (see sheet 4 of my spreadsheet).
I calculated annually return rate of Company “M” by adding all monthly return rate (with dividends) then I used from historical returns mentioned on below link:



To analyze the Beta, I got the gradient as follows:

Beta = Delta (company’s return) / Delta (Market return)

Here is my data:
Year
Rc
Rm
2005
-7.67%
4.83%
2006
64.12%
15.61%
2007
-3.31%
5.48%
2008
-49.42%
-36.58%
2009
39.61%
25.92%
2010
41.53%
14.86%

Where:
Rc = the return rate of Company
Rm= the return rate the whole of the market


    Year
                  Beta
2006
    6.659839
2007
6.656976
2008
1.096235
2009
1.424453
2010
-0.17352
B (av)
3.132797


As we can see, in this case, the average of Beta is not important but the trend
of the Beta is very contemplative. I remember that I wrote an article
of “ New Economic System” on below link:


Maybe this method to analyze the Beta will lead us toward the better 
perception and analysis of economic systems.

 
Note:  “All spreadsheets and calculation notes are available.
 The people, who are interested in having my spreadsheets
 of this method as a template for further practice, do not
 hesitate to ask me by sending an email to
soleimani_gh@hotmail.com or call me on my cellphone:
 +989109250225.
Please be informed these spreadsheets are not free of charge.”