Relationship between beta and stock returns Mayur Agrawal Varun Agrawal Debabrata Mohapatra Sung Kyun Park Vikas Yadav.

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Presentation transcript:

Relationship between beta and stock returns Mayur Agrawal Varun Agrawal Debabrata Mohapatra Sung Kyun Park Vikas Yadav

Factor affecting stock returns Beta alone cannot explain differences in stock-returns. Other variables (e.g. size, book to market ratio, P/E ratio) have significant predictive ability. Ref: 1.Gabriel Hawawini, Donald B Keim, “The Cross Section of Common Stock Returns: A review of the evidence and some new findings” 2.Eugene E. Fama, Kenneth R. French, “ Common Risk Factors in the Returns on Stock and Bonds”

Portfolio Development Factors affecting stock returns  Stock Beta  Historical Stock Volatility  Market Capitalization  Price-to-book ratio

Beta Parameters: Past data for Beta calculation = 5 years Readjustment time = 1 year Analysis Duration = Dec 3, Dec 3, 2008 Relative Market Cap Weighted Return

Volatility

Portfolio allocation based on multiple parameters Sorting of stocks based on volatility

Re-sorting of each bin of stock based on beta

Volatility and Beta

Market Capitalization Stock Price *Number of shares outstanding

Market Cap and Beta

Beta portfolio subdivision