What is the risk of holding a companys share?

That you would lose money, or earn lesser returns than you expected to. Measures of risk: The basic premise of capital markets and investing is that all investors are risk averse. All investors prefer to minimize risk and maximize returns. So, lets assume a hypothetical case where you have two securities in your portfolio: HDFC Bank and Dhanlaxmi Bank. The risk levels of both the securities are the same, but the expected returns for HDFC Bank is 12% whereas for Dhanlaxmi Bank is 8%. Which one would you invest in? Naturally, in HDFC Bank. Now, lets assume, the risk of investing in HDFC is slightly higher than before, would you be satisfied with the same amount of returns as before 12%, or would you expected to be rewarded higher for assuming more risk? Yes, any investor would expect a higher return for taking on greater risk. But, how is this risk measured? And is it comparable with another firm from another industry? The total risk measure comprises systematic risk and unsystematic risk. Standard deviation measures the total risk. Total risk = Systematic risk + unsystematic risk 1. Unsystematic risk the kind of risk that is specific to a company or a small set of stocks. Regulations impacting a particular industry like mining ban in Karnataka, or the 2G scam affecting telecom industry are examples of unsystematic risk. Unsystematic risk can be reduced by diversifying ones portfolio. Workers strike at Marutis plant in Manesar in Haryana last year is a type of unsystematic risk. The event lead to a decline in quarterly sales and not able to fulfill orders. Reducing exposure or not investing in Maurti in ones portfolio, and instead having Mahindra & Mahindra or some other defensive stock like FMCG, is an example of reducing unsystematic risk. 2. Systematic risk (also known as market risk measured by beta) The risk that a portfolio is exposed to after diversification is called systematic risk. This risk arises from factors beyond ones control such as macroeconomic factors or policies of a government, or political events. Systematic risk affects the entire market irrespective of the industry. A good example is the effect of Greeces debt default on Indian stocks, or global stocks for that matter. Systematic risk is measured by beta.

What is beta? Beta is a measure of systematic risk, a risk that cannot be avoided by diversifying ones portfolio. In simple terms, it measures the volatility of a stocks returns in comparison to the market. Beta is used to calculate a stocks expected return in the widely followed capital asset pricing model (CAPM). E(R) = RFR + *ERP where E(R) = expected returns of a stock RFR = Risk free rate (for example, government/sovereign bonds) beta ERP expected risk premium calculated as expected returns on market risk free rate In the Risk Vs Reward section, I wrote that the expected returns of any investment is based on the risks involved in that investment. Stock Beta extends the concept to investments in Stock.

Returns from Stock = Risk Free Rate + Risk Premium Risk Premium can further be broken down into the Risk Units and Returns per risk units. By breaking it this way, we can easily standardize the Returns Per risk units and the only variable will be the risk units. So re-examine the above equation. Returns from Stock = Risk Free Rate + (Risk Units for this stock * Market Risk Premium per risk units) In plain English, Beta of a stock just measures how the given stock will perform in relation (or when compared with) the market in general. A Beta of 1, indicates that the stock will move at the same rate as the market in general or on average. Beta > 1 means that the stock is expected to perform worse than the market in general or on average. = covariance of a stocks returns relative to market returns/ variance of market Covariance is a statistical measure that defines the movement of two variables. It can take any value from -ve infinity to +ve infinity; the number by itself doesnt convey anything. What does a beta value of 1.3 or 0.8 mean? A stocks beta of 1.3 implies the stock is 30% more volatile than the market or index it is compared against. Commodity and banking stocks usually have a higher beta whereas defensive stocks have a beta lesser than 1. A beta of 0.8 indicates the stock is 20% lesser volatile than the market.

How is beta computed? Beta is calculated using regression analysis. But, if youre really interested on knowing more about linear regression analysis

Why is beta measure important? Beta measure is significant because it tells you how a stocks returns are commensurate with the market especially in a highly volatile period such as the period after August 2011, . High beta stocks fall rapidly during market decline and gain more than the market during a rally. High risk, high returns are the premise. Advantages of Beta To followers of CAPM, beta is a useful measure. A stock's price variability is important to consider when assessing risk. Indeed, if you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a safe-haven utility industry stock with a low beta. Besides, beta offers a clear, quantifiable measure, which makes it easy to work with. Sure, there are variations on beta depending on things such as the market index used and the time period measured, but broadly speaking, the notion of beta is fairly straightforward to understand. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method that discounts cash flows. Disadvantages of Beta However, if you are investing in a stock's fundamentals, beta has plenty of shortcomings. For starters, beta doesn't incorporate new information. Consider a utility company, let's call it Company X. Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed high debt levels, X's historic beta no longer captured the substantial risks the company took on. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. Another troubling factor is that past price movements are very poor predictors of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful.

The Bottom Line It's important for investors to make the distinction between short-term risk - where beta and price volatility are useful - and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.

List of High Beta Stocks on NSE BSE India and their Beta Values
Below is the table which indicates the Beta values of all the NSE Stocks in the reverse order of Beta

Sr 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Symbol JPASSOCIAT HINDALCO STER ICICIBANK TATAMOTORS DLF TATASTEEL IDFC RELCAPITAL SUZLON AXISBANK SESAGOA SAIL RELINFRA KOTAKBANK RCOM SBIN JINDALSTEL HDFC

Security Name Jaiprakash Associates Hindalco Industries Sterlite Industries (India) ICICI Bank Tata Motors DLF Tata Steel IDFC Reliance Capital Suzlon Energy Axis Bank Sesa Goa Steel Authority of India Reliance Infrastructure Kotak Mahindra Bank Reliance Communications State Bank of India Jindal Steel & Power HDFC

Industry DIVERSIFIED ALUMINIUM METALS BANKS AUTOMOBILES - 4 WHEELERS CONSTRUCTION STEEL AND STEEL FINANCIAL INSTITUTION FINANCE ELECTRICAL EQUIPMENT BANKS MINING STEEL AND STEEL POWER BANKS TELECOM - SERVICES BANKS STEEL AND STEEL FINANCE - HOUSING

Beta 1.7 1.64 1.53 1.51 1.51 1.43 1.38 1.36 1.34 1.32 1.29 1.29 1.24 1.23 1.17 1.17 1.15 1.14 1.12

Volatility 5.07 2.56 2.23 2.5 3.78 2.43 2.15 3.52 4.76 3.31 2.56 2.75 1.89 6.29 2.85 3.99 2.33 2.46 2.45

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49

M&M LT RELIANCE RPOWER HDFCBANK AMBUJACEM CAIRN HCLTECH RANBAXY PNB TCS BHEL WIPRO ITC INFOSYSTCH BHARTIARTL MARUTI TATAPOWER BAJAJ-AUTO ONGC ACC SIEMENS NTPC SUNPHARMA GAIL HEROHONDA BPCL HINDUNILVR DRREDDY POWERGRID

Mahindra & Mahindra Larsen & Toubro Reliance Industries Reliance Power HDFC Bank Ambuja Cements Cairn India HCL Technologies Ranbaxy Laboratories Punjab National Bank Tata Consultancy Bharat Heavy Electricals Wipro ITC Infosys Technologies Bharti Airtel Maruti Suzuki India Tata Power Co. Bajaj Auto Oil & Natural Gas Corp ACC Siemens NTPC Sun Pharmaceutical GAIL (India) Hero Honda Motors Bharat Petroleum CL. Hindustan Unilever Dr. Reddy's Laboratories Power Grid Corporation

AUTOMOBILES - 4 WHEELERS ENGINEERING REFINERIES POWER BANKS CEMENT AND CEMENT OIL EXPLORATION/PROD COMPUTERS - SOFTWARE PHARMACEUTICALS BANKS COMPUTERS - SOFTWARE ELECTRICAL EQUIPMENT COMPUTERS - SOFTWARE CIGARETTES COMPUTERS - SOFTWARE TELECOM - SERVICES AUTOMOBILES - 4 WHEELERS POWER AUTOMOBILES - 2 & 3 WHEELERS OIL EXPLORATION/PROD CEMENT AND CEMENT ELECTRICAL EQUIPMENT POWER PHARMACEUTICALS GAS AUTOMOBILES - 2 & 3 WHEELERS REFINERIES DIVERSIFIED PHARMACEUTICALS POWER

1.12 1.07 1.05 1.05 0.99 0.89 0.89 0.88 0.88 0.85 0.83 0.81 0.81 0.76 0.75 0.73 0.68 0.67 0.64 0.64 0.61 0.61 0.57 0.56 0.54 0.52 0.51 0.51 0.48 0.48

2.7 2.97 1.9 2.96 1.77 2.2 1.74 1.74 2.24 2.05 1.71 2.02 1.72 2.56 1.31 1.94 1.72 1.64 1.89 2.01 1.58 0.4 1.66 2.08 1.36 2.92 2.3 1.08 1.69 1.22

50

CIPLA

Cipla

PHARMACEUTICALS

0.46

1.02

Beta Values of Nifty 50 Stocks and Junior Nifty

Sno 1 2 3 4 5 6 7

Security Symbol ABB ACC AMBUJACEM Axis Bank BHARTIARTL BHEL BPCL

Security Name ABB Ltd. ACC Ltd

Weightage 0.56% 0.71%

Beta 0.87 0.73 0.86 1.26 0.99 0.99 0.43

Ambuja Cements 0.70% Ltd. Axis Bank Ltd. Bharti Airtel Ltd. Bharat Heavy Electricals Ltd. Bharat Petroleum Corporation Ltd. Cairn India Ltd. Cipla Ltd. DLF Ltd. GAIL (India) Ltd. Grasim Industries Ltd. HCL Technologies Ltd. Housing Development Finance Corporation Ltd. HDFC Bank Ltd. Hero Honda Motors Ltd. Hindalco Industries Ltd. Hindustan Unilever Ltd. ICICI Bank Ltd. Idea Cellular Ltd. Infosys Technologies Ltd. ITC Ltd. Larsen & Toubro Ltd. Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. National Aluminium Co. Ltd. NTPC Ltd. Oil & Natural Gas Corporation Ltd. Punjab National 1.51% 4.06% 2.80% 0.49%

8 9 10 11 12 13

CAIRN CIPLA DLF GAIL GRASIM HCLTECH

0.80% 1.03% 1.14% 1.18% 1.49% 0.41%

1.1 0.51 1.56 0.74 0.8 1.09

14

HDFC

5.05%

1.18

15 16 17 18 19 20 21

HDFCBANK HEROHONDA HINDALCO HINDUNILVR ICICIBANK IDEA INFOSYSTCH

4.09% 1.15% 0.86% 2.42% 6.70% 0.99% 7.83%

0.9 0.45 1.19 0.41 1.56 1.15 0.68

22 23 24 25 26

ITC LT M&M MARUTI NATIONALUM

5.08% 7.01% 1.35% 1.48% 0.20%

0.5 1.18 1.1 0.67 0.99

27 28

NTPC ONGC

1.48% 3.11%

0.74 0.89

29

PNB

0.73%

0.87

Bank 30 POWERGRID Power Grid Corporation of India Ltd. Ranbaxy Laboratories Ltd. 0.53% 0.79

31

RANBAXY

0.34%

0.77

32

RCOM

Reliance 1.47% Communications Ltd. Reliance Capital Ltd. Reliance Industries Ltd. Reliance Infrastructure Ltd. Jindal Steel & Power Ltd. Reliance Power Ltd. Steel Authority of India Ltd State Bank of India Siemens Ltd. 0.80% 11.04% 1.35%

1.52

33 34 35

RELCAPITAL RELIANCE RELINFRA

1.56 1.23 1.67

36 37 38 39 40 41

JINDALSTEL RPOWER SAIL SBIN SIEMENS STER

1.49% 0.49% 0.81% 3.70% 0.58%

1.13 1.03 1.31 1.08 0.98 1.43

Sterlite 1.41% Industries (India) Ltd. Sun Pharmaceutical Industries Ltd. Suzlon Energy Ltd. 0.70%

42

SUNPHARMA

0.41

43 44

SUZLON TATACOMM

0.45%

1.64 0.9

Tata 0.27% Communications Ltd. Tata Motors Ltd. 0.79% Tata Power Co. Ltd. Tata Steel Ltd. Tata Consultancy Services Ltd. Unitech Ltd. Wipro Ltd. 1.53% 1.77% 1.94%

45 46 47 48

TATAMOTORS TATAPOWER TATASTEEL TCS

1.2 0.91 1.46 0.89

49 50

UNITECH WIPRO

0.96% 1.18%

1.7 0.92