Beta and capm

Beta is using by investors to measure of stock price risk volatility in relation to the overall market. The coefficient of beta is equal to1. Stocks with betas greater than 1 is considered to be more volatile than market therefore is more risky to held equity for investors. Beta calculation is important for investments to measure they risk therefore the risk cannot be reducing, the best way to reduce risk when investors creating they well-diversified portfolio. Especially is recommended for long time investment, beta calculation is important therefore they can be certain about the risk rate of they long time investment. Sometimes betas can be ready calculated and provided by the index although is better and more reliable for investors to calculate they own betas. Especially if they UK and American combined portfolios which is UK equity not will be included in the index S&P 500, which is American, based companies. Therefore investors by calculating they own betas can have more accurate information about risk on they investment, which is the main advantage. Also additionally the own calculated betas also includes drawback to investors. When investors prefer to use they own beta instead of using ready prepared it takes longer period for preparing they own beta calculation, especially for investment time is important.

To establish beta for analysis of both companies information was taken from Yahoo Finance website using close price columns by converting these prices in to return percentages. All beta calculations for both companies are available and can be found in the appendix.

To calculate beta for investors taking five years data also is possible to use ten years because longer period can give more information about equity of the company to investors, although in a real life the companies risk characteristics could change rapidly over the period. Therefore for this analysis of beta Mulberry Group Plc. and Ted baker Plc. have been used data only five year because there is more likely that the company’s profits would suffer from non-trading and it could really effect investment.

Companies are familiar with information, that investors only interested in maximizing their investment returns and to minimize risk to lowest possible. For that reason Mulberry Group Plc. and also Ted Baker plc. Investors are able to analyze company returns by calculating Beta and also can find all information given to public. From the information given by the company, investors can have better knowledge about the company therefore they can make decision to invest or not.

Mulberry Group Plc. is listed FTSE AIM (alternative investment market) all-share super sector Index-Personal & household goods which is Mulberry Group Plc. =20.088%, therefore beta calculation for this analysis have been used FTSE AIM index and another company have been chosen for this analysis Ted Baker Plc is listed on FTSE 250 index therefore we will be using these index for calculation. One of the company beta calculations took the period of last 5 years weekly return and another 10 years monthly return intervals. But in real life information had been found in the books stating that calculation of beta is more accurate using shorter return intervals and can give more reliable information to investors.

For the calculation of Mulberry Group Plc. Beta by extracting needed information from Yahoo! Finance. Beta has been calculated by using data for 10 years period monthly returns for both FTSE AIM and Mulberry Group Plc.

For Ted Baker we extracted data also from Yahoo! Finance interval of weekly returns, also for index FTSE 250.

Mulberry Group Plc. Is listed on FTSE AIM index which is includes also many other large companies. Which is helps to the companies to attract consumers not only from UK but also many international consumers.

Result of beta calculation of Mulberry Group Plc. for 10 years monthly intervals came at the figure of 0.97. When stock beta from 1 to 0 it is meaning that stock is moving the same direction as the market. Also similar Ted Baker Plc., results which is beta equal to 0.699 for both companies beta calculation we using different data Mulberry is monthly intervals and Ted Baker is weekly all data is attached in the end of analysis.

At the present time beta was in 2016 Mulberry Group Plc. =0.5307 and Ted Baker Plc. =0.7284 the figures are taken from Financial Times. It can be seen that beta slightly different then was calculated from extracted data.

Comparing betas of both companies we can state that Ted baker Plc. is less risky to invest for investors then Mulberry Group Plc.

However only to establish betas of the company share, like Mulberry Group Plc. or Ted Baker Plc. is not enough information for investors. Most important for investors to have reliable information about expected return from the shares they will invest they capital and how risky in can be.

Mulberry Group Plc.

In the chart above we calculated Mulberry Group plc. .betas to compare them how they would change. Calculation takes a place 5 years period monthly return intervals. Over 5 years from 2014 to 2009 Mulberry group Plc. Beta was highest 1.364 that figure could explain to investors that when the market rise also the share price rises and also is explain to the shareholders that Mulberry Group Plc. Share price is more volatile then the market and can give to investors higher return.

Another chart analysis below of beta Ted Baker Plc. Which has been used it for the same period as Mulberry Group Plc. above 5 years monthly intervals. Although from the chart investors could see that company beta is less then 1 as we know that beta( between 0 to 1 moving same direction as market and also investments in the companies with beta less then 1 is less risky.

Ted Baker Plc.

Conclusion

In summary of beta calculations we can tell that Ted Baker company is less risky for investors to invest then Mulberry and is more recommended to invest. However is arguable if these results are reliable. Because some information is stating that only beta calculation is not enough. Also can be seen from beta analysis that changing in sales effecting beta also. Another factor that beta is not really reliable because using past price of the stock is very poor predictions of the future. in addition for some investors beta doesn’t really help to find difference and the beta cannot guarantee for the future cash flows of the firm.

Another two components for beta calculation and additionally important methods to calculate how risky is investment, regression and capital asset pricing model. Although in this analysis we will calculate CAPM. Capital Asset Pricing Model is often used by investors to calculate expected return by measuring risk of investments in the market. For investors are most important value of the money, time and what risk they would take. The formula of Capital Asset Pricing Model (CAPM) is follows : Er=Rf+*(Rm-Rf). Naylor and Tapon (1982) suggested that companies should obtain low covariance between returns on capital of different divisions. Therefore according this to the capital asset pricing model (CAPM) this is not important. The sums of all entity values of the separate divisions are reliant on return rates and their risk and also important market factors.

Additionally Naylor and Tapon (1982) suggested that companies must sell or buy divisions established on their risk and return assets.

According to the capital asset pricing model (CAPM) that for calculation of stock return that investors need to have knowledge about the risk premium which is determined by it components and their returns and also stock betas.

For the calculation risk free rate attached appendix in the end of this analysis it has been uses United Kingdom government issued gilts bonds. The UK government issued gilts has the highest AAA credit ratings comparing to the others. It is true that UK government gilts are risk-free investment but there is no guarantee of return because of the uncertainty about inflation.³

Therefore for the analysis and calculation CAPM for both companies the figure been used of 2 years United Kingdom gilt yield taken from Bloomberg which was 0.34% on the 7^th of June 2016. Therefor the rate of UK bonds is not fixed and is changing on daily basis.

All calculations for beta, CAMP, risk free, return of both companies Mulberry Group Plc. and Ted Baker Plc. can be found in the Appendix at the end of this analysis. Using formula of capital asset pricing model (CAPM) we estimated that investor’s required minimum return and the figures are for both companies all calculation answers can be seen in the table below:

Mulberry Group Plc. Ted Baker Plc.

5 years monthly 5 years weekly

intervals intervals

Mean	0.07%	0.16%
St. Deviation	0.05717	0.02056
Variance	0.00326	0.00042
Covariance	0.00317	0.00029
Beta	0.97241	0.69950
Risk Free 2 years yield	4.15%	4.15%
Return FTSE	8.73%	1.93%
CAPM	8.60%	2.60%

However in order to use capital asset pricing model all values need to be appointed to the risk free rate and beta of equity which could be not accurate. The main reason that yield of UK government gilts which ones used to substitute risk free rate of asset return which are rate is not fixed and changing on daily basis depends on economy at present time.

Also could be familiar problem with calculation using betas because sometimes could be not all information available of the organizations. Some of them can have debts, which are not provided therefore beta of the company with debt is equal to zero, which can lead to not accurate assumption.