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Relationship between beta and stock returns

Relationship between beta and stock returns. Mayur Agrawal Varun Agrawal Debabrata Mohapatra Sung Kyun Park Vikas Yadav. Points. Why this figure is not following the investment tradition? Something behind we cannot see? Prove that higher risk is not always guaranteed higher return

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Relationship between beta and stock returns

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  1. Relationship betweenbeta and stock returns MayurAgrawal VarunAgrawal DebabrataMohapatra Sung Kyun Park VikasYadav

  2. Points • Why this figure is not following the investment tradition? • Something behindwe cannot see? • Prove that higher risk isnot always guaranteedhigher return • Analyze the cause of this issue

  3. M_Cap Data sets duration 1 year N years rtndate 1st Jan 1962 31st Dec 2008 Current Time bgdate enddate • Beta - Duration of experiment 1st Jan 1962 – 31st Dec 2008 • Market Cap - Duration of experiment 1999 , 2002 , 2007 and 2008 • Consider yearly updates to the S&P500 membership list • Obtain S&P500 membership list at the beginning of each year (Jan. 2nd) • Obtain S&P500 companies present on enddate

  4. Market Capitalization - Sorting • M_Cap = # of shares outstanding x Price • Sort the M_Cap from lowest to highest • Grouping by 10, Each group has 50 companies • Returns are weighted by each companies in groups Weighted returns 10 groups by M_Cap

  5. Market Capitalization - Calculation *mcap = prc * share_outstd; … for(ii = 0; ii < count; ii++) { totalmcap[ii/50]+=marketcap[ii]; } for(ii = 0; ii < count; ii++) { mcap_decile[ii/50]+= marketcap[ii]/50; rtn_decile[ii/50]+= (marketcap[ii]/totalmcap[ii/50])*rtn[ii]; } • M_Cap = # of shares outstanding x Price • Sort the M_Cap from lowest to highest • Grouping by 10, Each goup has 50 companies • Hold these portfolios for 1 year • Compute the 1 year return by looking into the future

  6. M_Cap - Return

  7. Volatility 1 year N years 1st Jan 1962 31st Dec 2008 bgdate enddate rtndate Begin Date = 2000/02/03 End Date = 2006/02/03 Return Date = 2007/12/03

  8. Beta - Volatility

  9. Beta - Volatility

  10. Back to the basic • Need to figure it outwith different point of views • Can be proved or overturned • See you on round 2

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