Project

Submitted To:
Mr. Khalid Sohail
Submitted By:
Waseem Ahmed
SP14-RBA-008/ISB
Topic:
Variability of Beta Over time
Program:
RBA-2
Date:02-01-2015

Page
1

Table of Contents
Introduction03
Beta (Systematic Risk) .......04
Introduction of Stocks.........05
Variability of beta over time...........05
Methodologies for beta calculations.06
BOP beta estimation summary07
BOP monthly data regression model08
BOP monthly data Scatter diagram09
HBL beta estimation summary09
HBL monthly data regression model10
HBL monthly data Scatter diagram.10
Analysis.11
Conclusions 12
References14

Page
2

Introduction:
A securitys beta may very substantially depending upon whether it is estimated on the
basis of daily, weekly, fortnightly or monthly returns of that security.
Basically the betas of securities with smaller market value than the average of the market will
decrease as the return interval is shortened, whereas the betas of securities with a large
market value relative to the market will increase. This suggest that betas measured over
return intervals of arbitrary length will tend to be less risky than truly are, whereas securities
with relatively large market values may appear to be more risky than they truly are.
Securitys historical rate of returns can be used to estimate its systematic risk. Rate of returns
can be calculated as daily, weekly, fortnightly and monthly basis then with the help of those
returns on different time interval betas can be estimated and its variability over time.

Beta Definition:
Page
3

A measure of the volatility, or systematic risk, of a security and a portfolio in comparison to

the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that
calculates the expected return of an asset based on its beta and expected market returns
Beta is calculated using regression analysis, and you can think of beta as the tendency
of a security's returns to respond to swings in the market. A beta of 1 indicates that the
security's price will move with the market. A beta of less than 1 means that the security will be
less volatile than the market. A beta of greater than 1 indicates that the security's price will be
more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more
volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech, NASDAQ-based
stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also
posing more risk.
Systematic Risk
Risk is a consideration in every investment decision and, for a stock, risk is quantified by beta.
Fortunately, the widespread availability of published betas on many financial websites
makes the acquisition of this risk metric conveniently available. On the other hand, the
calculation of beta does not include consistent factors, thus making the interpretation of
published betas and the ensuing risk difficult and incomplete.
If you want to know how much systematic risk a particular security, fund or portfolio has, you
can look at its beta, which measures how volatile that investment is compared to the overall
market. A beta of greater than 1 means the investment has more systematic risk than the
market, less than 1 means less systematic risk than the market, and equal to one means the
same systematic risk as the market.
Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very
specific group of securities or an individual security. Unsystematic risk can be mitigated
through diversification.
Page
4

Introduction of stocks:
Habib Bank Limited (HBL):
HBl (formerly Habib Bank Limited) now referred to as "HBL Pakistan" and headquartered
in Habib Bank Plaza,Karachi, Pakistan, is the largest bank in Pakistan. The bank has a
network of over 1500 branches and over 1000 ATM(S) in Pakistan and 55 branches
worldwide. It has a domestic market share of over 40%. It continues to dominate the
commercial banking sector with a major market share in inward foreign remittances (55%)
and loans to small industries, traders and farmers.
Bank of Punjab (BOP):
The Bank

of

Punjab is

Pakistani

bank

headquartered

at

BOP

Tower,

Main

Gulberg, Lahore Pakistan. It serves Pakistan and functions as an international bank and is
one of the prominent financial institutions of the country holding AA ratings from PACRA. The
bank was established in 1989, pursuant to The Bank of Punjab Act 1989, and was given the
status of a retail bank in 1994.

Variability of beta over time

A securitys beta may very substantially depending upon whether it is estimated on the basis
of daily, weekly, fortnightly or monthly returns of that security.
Betas are not constant:
A stable beta implies that the systematic risk of a firm does not change; that is to say that the
relationship between the stock and the market is continuous. A company (fund) is like a
living entity that changes through time, bringing in managers with a higher(lower) risk
appetite, developing new products, expanding into new markets, and being exposed to
new regulations and new competition. Consequently, the firm is not static and should not be
expected to behave and perform at a constant measureable level.
Page
5

Basically the betas of securities with smaller market value than the average of the market will
decrease as the return interval is shortened, whereas the betas of securities with a large
market value relative to the market will increase. This suggest that betas measured over
return intervals of arbitrary length will tend to be less risky than truly are, whereas securities
with relatively large market values may appear to be more risky than they truly are.
Securitys historical rate of returns can be used to estimate its systematic risk. Rate of returns
can be calculated as daily, weekly, fortnightly and monthly basis then with the help of those
returns on different time interval betas can be estimated and its variability over time.
Here in this study we used two different stocks (HBL and BOP) and there returns in different
time intervals like daily, weekly, fortnightly and monthly. We used KSE-100 index as market
proxy. We have three-year period july 2011 to june 2014, and estimated betas of Habib Bank
limited and Bank of Panjab on daily, weekly, fortnightly and monthly returns.

Methodologies for Beta calculations:

Different methodologies and formulas used for Beta calculation. Those formulas are as
follows;
Average formula:

Beta manual calculations (By excel):

Computational formula:

Page
6

 Conceptual formula:
N (sum XY)-sum XY/N (sum X^2)-(sum X)^2
Slop function
Covariance and variance function

Beta Estimation:
Here, betas for the three-year period July 2011 to June 2014 have been estimated using 36
monthly returns, 250 daily returns, 72 fortnightly and 156 weekly returns.
BOP Monthly Beta Calculations:

Date

Share
price

6/1/2010

6.65

7/29/201
1

Index
12496.
03

RF

12,190
.37

0.0112
58

6.04

10,903
.88
11,642
.46

0.0112
58
0.0112
58

10/28/20
11

5.77

11,561
.67

0.0112
58

11/30/20
11

5.55

11,532
.83

0.0112
58

12/30/20
11

5.41

11,347
.66

0.0112
58

8/29/201
1
9/29/201
1

6.38
5.29

Mkt
model
beta

Ri

Rm

y1

x1

0.0244
6
0.1055
3
0.0677
36
0.0069
4
0.0024
9
0.0160
6

0.0518
6

0.0357
2
0.1167
9
0.0564
77

0.0406
0.1708
5
0.1417
77
0.0447
0.0381
3
0.0252
3

Page
7

CAPM

0.1821
0.1305
19
0.0559
6
0.0493
9
0.0364
8

0.0182
0.0137
5
0.0273
1

1/27/201
2
2/24/201
2
3/26/201
2

10.47

11,960
.21
12706.
52
13286.
73

0.0112
58
0.0112
58
0.0112
58

4/23/201
2

9.95

14083.
44

0.0112
58

5/22/201
2

8.94

14142.
08

0.0112
58

8.3

13682.
99
14445.
28

0.0112
58
0.0112
58

8/15/201
2

8.19

14970.
92

0.0112
58

9/18/201
2

8.16

15517.
19

0.0112
58

15654.
62
16251.
38
16801.
02

0.0112
58
0.0112
58
0.0112
58

8.82

16181.
47
17797.
22

0.0112
58
0.0112
58

8.26

17664.
83

0.0112
58
0.0112
58
0.0112
58
0.0112
58
0.0112
58

6/19/201
2
7/17/201
2

10/17/20
12
11/19/20
12
12/17/20
12
1/16/201
3
2/15/201
3
3/15/201
3

5.85
8.78

7.96

8.06
8.82
9.2
7.83

4/12/201
3
5/13/201
3
6/10/201
3

14.73

18714.
28
20244.
82
22150.
74

7/8/2013

14.62

22365.
72

8.27
9.31

0.0813
31
0.5008
55
0.1924
83
0.0496
7
0.1015
1
0.1096
2
0.0427
14
0.0132
5
0.0036
6
0.0122
5
0.0942
93
0.0430
84
0.1489
1
0.1264
37
0.0634
9

0.0539
8
0.0623
99
0.0456
62

0.0012
11
0.1257
56
0.5821
7
0.0074
7

0.0594
09
0.0817
85
0.0941
44

0.0599
63
0.0041
64
0.0324
6
0.0557
11

2.4285
7

0.0363
88
0.0364
89
0.0088
57
0.0381
2
0.0338
21
0.0368
8
0.0998
52
0.0074
4

0.0097
05
Page
8

3.2244
28

0.0700
73
0.4895
96
0.1812
25
0.0609
2
0.1127
7
0.1208
8
0.0314
55
0.0245
1
0.0149
2
0.0235
1
0.0830
34
0.0318
26
0.1601
7
0.1151
78
0.0747
5
0.0100
5
0.1144
97
0.5709
11
0.0187
3

0.0427
22
0.0511
41
0.0344
04
0.0487
05
0.0070
9
0.0437
2
0.0444
52

2.4285
7

0.0251
3
0.0252
3
0.0024
0.0268
62
0.0225
63
0.0481
3
0.0885
94
0.0187
0.0481
51
0.0705
26
0.0828
85
0.0015
5

3.2244
28

0.1497
9
0.1335
5

8/6/2013

12.43

22621.
93

0.0112
58

9/6/2013

10.77

22765.
87

0.0112
58

10/4/201
3

10.88

22085.
96

0.0112
58

11.95

23220.
21
24998.
89

0.0112
58
0.0112
58

1/7/2014

11.54

26259.
57

0.0112
58

2/6/2014

11.04

26862.
51

0.0112
58

3/6/2014

11.32

26842.
53

0.0112
58

4/3/2014

10.28

28336.
36

0.0112
58

5/2/2014

8.88

28921.
13

0.0112
58

5/30/201
4

8.75

29167.
54

0.0112
58

0.0253
62
0.0918
7
0.1361
9
0.0146
4

8.97

28987.
75

0.0112
58

0.0251
43

11/7/201
3
12/9/201
3

6/27/201
4

10.31

0.0102
14
0.0523
9
0.1590
69
0.0343
1
0.0433
3

0.1610
5
0.1448
1
0.0010
4
0.0636
5
0.1478
11
0.0455
7
0.0545
9

0.0114
55
0.0063
63
0.0298
7
0.0513
56
0.0766
01
0.0504
29
0.0229
61
0.0007
4

0.0141
04
0.1031
3
0.1474
5

0.0556
52
0.0206
37
0.0085
2
0.0061
6

0.0259
0.5222
13

0.0138
85

BOP Beta estimation Summary:

Market

Daily

weekly

Fortnightly

Monthly

model
1st year
2nd year
3rd year
CAPM
1st year
2nd year
3rd year

1.7221
0.4738
0.3452
Daily
1.7222
0.4686
0.3452

1.7600
1.8917
0.1137
weekly
1.7593
1.8917
0.1134

1.4107
1.8645
-0.2496
Fortnightly
1.4115
Page
1.8645
9 -0.2496

2.4285
3.2244
0.5222
Monthly
2.4285
3.2244
0.5222

0.0001
97
0.0049
0.0411
2
0.0400
98
0.0653
42
0.0391
71
0.0117
02
-0.012
0.0443
93
0.0093
78
0.0027
4
0.0174
2

0.5222
13

Regression model of BOP monthly returns:

SUMMARY OUTPUT
Regression
Statistics
0.6084
Multiple R
39
0.3701
R Square
98
Adjusted
0.3522
R Square
04
Standard
0.1252
Error
77
Observati
ons
37
ANOVA
Df
Regressio
n

Residual

35

Total

36

Intercept
X
Variable 1

Coeffici
ents
0.0354
4
2.2393
74

SS
0.3228
8
0.5493
02
0.8721
81
Standa
rd
Error
0.0237
28
0.4937
17

MS
0.322
88
0.015
694

t Stat
1.493
43
4.535
748

F
20.57
301

Signific
ance F
6.46E05

Pvalue

Lower
95%

Upper
95%

0.144
286
6.46E05

0.08361
1.23707
6

0.012
734
3.241
673

Page
10

Lower
95.0%
0.083
61
1.237
076

Upper
95.0%
0.012
734
3.241
673

Scatter Diagram of BOP Monthly data:

0.15
0.1
0.05
0
-0.3

-0.2

-0.1
0
-0.05

0.1

0.2

0.3

0.4

0.5

0.6

0.7

-0.1
-0.15

HBL Monthly Beta Calculations:

Date
6/1/201
0

Share
price
116.0
4

Index
12496.
03

RF

7/28/201
1

119.6
8

12,098.
05

0.0112
58

8/25/201
1
9/28/201
1

116.5
6
118.3
2

10,901.
76
11,625.
69

0.0112
58
0.0112
58

10/27/20
11

115.6
3

11,283.
49

0.0112
58

11/29/20
11

111.9
9

11,506.
94

0.0112
58

12/29/20
11
1/26/201
2
2/23/201
2
3/22/201
2

108
114.7
8
125.1
7
100.7

11,435.
67
11,883.
92
12515.
92
13273.
29

0.0112
58
0.0112
58
0.0112
58
0.0112
58

Ri

Rm

0.0313
68
0.0260
7
0.0151
0.0227
3
0.0314
8
0.0356
3
0.0627
78
0.0905
21
0.1954

0.0318
5
0.0988
8
0.0664
05
0.0294
3
0.0198
03
0.0061
9
0.0391
98
0.0531
81
0.0605
13
Page
11

Mkt
model
beta

CAPM
y1
0.0201
1
0.0373
3
0.0038
41
0.0339
9
0.0427
4
0.0468
9
0.0515
19
0.0792
63
0.2067

x1
0.0431
1
0.1101
4
0.0551
47
0.0406
9
0.0085
45
0.0174
5
0.0279
39
0.0419
23
0.0492
54

4/20/201
2

108.8
1

13936.
48

0.0112
58

5/21/201
2

109.5
1

13875.
74

0.0112
58

6/18/201
2
7/16/201
2

107.7
5
113.7
2

13754.
13
14384.
58

0.0112
58
0.0112
58

8/13/201
2

114.9
7

14911.
97

0.0112
58

9/17/201
2

107.0
9

15398.
68

0.0112
58

10/16/20
12
11/16/20
12
12/14/20
12

105.7
7
109.3
2
116.9
7

15674.
3
16197.
74
16845.
09

0.0112
58
0.0112
58
0.0112
58

1/15/201
3
2/14/201
3

113.8
8
116.9
3

16107.
89
17765.
82

0.0112
58
0.0112
58

3/14/201
3

113.2
5

17740.
69

0.0112
58

4/11/201
3

96.3

18764.
55

0.0112
58

92.22
111.9
4

19916.
27
22358.
96

0.0112
58
0.0112
58

8/5/2013

126.5
6
167.4
1

22178.
34
22701.
3

0.0112
58
0.0112
58

9/5/2013

157.9
8

22451.
46

0.0112
58

5/10/201
3
6/7/2013
7/5/2013

9
0.0805
36
0.0064
33
0.0160
7
0.0554
06
0.0109
92
0.0685
4
0.0123
3
0.0335
63
0.0699
78
0.0264
2
0.0267
83
0.0314
7
0.1496
7
0.0423
7
0.2138
36
0.1306
06
0.3227
72
0.0563
3

0.0499
64
0.0043
6
0.0087
6
0.0458
37

0.1072
73

0.0366
64
0.0326
39
0.0178
99
0.0333
95
0.0399
65
0.0437
6
0.1029
27
0.0014
1
0.0577
13
0.0613
77
0.1226
48
0.0080
8
0.0235
8
0.0110
1
Page
12

0.9576
94

5
0.0692
78
0.0048
3
0.0273
3
0.0441
48
0.0002
7
0.0798
0.0235
8
0.0223
05
0.0587
2
0.0376
8
0.0155
24
0.0427
3
0.1609
3
0.0536
3
0.2025
78
0.1193
47
0.3115
13
0.0675
9

0.0387
06
0.0156
2
0.0200
2
0.0345
79

0.1072
73

0.0254
05
0.0213
81
0.0066
41
0.0221
36
0.0287
07
0.0550
2
0.0916
68
0.0126
7
0.0464
54
0.0501
19
0.1113
9
0.0193
4
0.0123
21
0.0222
6

0.9576
94

10/3/201
3

150.0
8

22152.
35

0.0112
58

11/6/201
3
12/6/201
3

146.5
4
162.9
9

23165.
21
24870.
55

0.0112
58
0.0112
58

0.0500
1
0.0235
9
0.1122
56

163.7
9
166.7
6

26169.
83
26751.
45

0.0112
58
0.0112
58

0.0049
08
0.0181
33

4/2/2014
4/30/201
4

170.8
8
175.5
5
184.8
5

26521.
99
27932.
02
28912.
98

0.0112
58
0.0112
58
0.0112
58

5/29/201
4

184.2

29006.
78

0.0112
58

0.0247
06
0.0273
29
0.0529
76
0.0035
2

6/26/201
4

182.6
9

29002.
76

0.0112
58

0.0082

1/6/2014
2/4/2014
3/5/2014

0.0133
2

0.0522
42
0.0222
25
0.0085
8
0.0531
65
0.0351
2

0.0612
6
0.0348
5
0.1009
98
0.0063
5
0.0068
75

0.0457
22
0.0736
16

0.0032
44
0.0001
4

1.0803
89

0.0134
48
0.0160
71
0.0417
18
0.0147
7
0.0194
6

HBL Beta estimation summary:

Market

Daily

Weekly

Fortnightly

Monthly

1st year

0.7265

0.6536

0.5767

0.1072

2nd year

0.9576

0.8346

0.7742

0.2136

3rd year

1.3554

1.0803

0.9756

0.5297

CAPM

Daily

Weekly

Fortnightly

Monthly

1st year

0.7263

0.6532

0.5765

0.1072

model

Page
13

0.0245
8
0.0344
64
0.0623
58
0.0409
83
0.0109
66
0.0198
4
0.0419
06
0.0238
61
0.0080
1
0.0114

1.0803
89

2nd year

0.9579

0.8374

0.0.7751

0.2173

3rd year

1.3534

1.0803

0.9767

0.5138

Regression model of HBL monthly returns:

SUMMARY OUTPUT
Regression Statistics
0.22601
Multiple R
5
0.05108
R Square
3
Adjusted R
0.02397
Square
1
Standard
0.08765
Error
9
Observation
s
37
ANOVA
Df

F
1.8841
43

Significa
nce F
0.17859
6

t Stat

Pvalue

Lower
95%

Upper
95%

Residual

35

Total

36

SS
0.01447
8
0.26894
5
0.28342
3

Coefficie
nts

Standard
Error

Intercept

0.00462
3

0.01661
5

0.2782
41

0.7824
64

-0.02911

0.0383
54

X Variable 1

0.47553
5

0.34643
8

1.3726
41

0.1785
96

-0.22777

1.1788
42

Regression

MS
0.0144
78
0.0076
84

Scatter Diagram of HBL Monthly Data:

Page
14

Lower
95.0%
0.0291
1
0.2277
7

Upper
95.0%
0.0383
54
1.1788
42

0.15
0.1
0.05
0
-0.3

-0.2

-0.1

0.1

0.2

0.3

0.4

-0.05
-0.1
-0.15

Analysis:
We recognize that high risk stocks should experience either very good or very bad
returns more frequently compared to low risk stocks, i.e. high risk stocks should
cluster in the tails of the cross-sectional return distribution. Building on this intuition,
we test the risk interpretation of the CAPMs beta by examining if high beta stocks
are more likely than low beta stocks to experience either very high or very low
returns. The departure point for our tests is the intuition that risky stocks should
experience very good or very bad returns more frequently compared to low risk
stocks, i.e. risky stocks should concentrate in the tails of the cross-sectional return
distribution. Building on this insight, a test of whether high beta stocks are more risky is
equivalent to testing if high beta stocks tend to experience very high and very low returns
more often than low beta stocks.
BOP betas based on weekly, fortnightly and monthly returns are 1.7600, 1.4107 and 2.4285
whereas the daily beta is 1.722 in 1 st year, as its smaller market value than the average of all
securities outstanding. In 2nd and 3rd year BOP betas on weekly, fortnightly and monthly are
more than its daily beta. And in the case of estimation of HBL on the other hand, weekly,
fortnightly and monthly betas are 0.6536, 0.5767 and o.1071 which are less than its daily beta
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15

0.7265 in 1st year. When the return interval is shortened, the following occurs, securities with a
smaller market value than the average of all securities outstanding (the market) will generally
have decreased beta. Whereas securities with a larger market value than the average of all
securities outstanding will generally have an increasing beta.

Market value of Shares outstanding:

Market value of shares outstanding is another fact about why betas shift upward or downward
over time. Market value of shares outstanding can also use as a proxy for securitys relative
market thinness to determine the direction of the shift in beta.

The price an asset would fetch in the marketplace. Market value is also commonly
used to refer to the market capitalization of a publicly-traded company, and is obtained
by multiplying the number of its outstanding shares by the current share price. Market
value is easiest to determine for exchange-traded instruments such as stocks and
futures, since their market prices are widely disseminated and easily available, but is a
little more challenging to ascertain for over-the-counter instruments like fixed income
securities.
Number of shares outstanding:
HBL

1,466,852,508

BOP

1,555,113,165

MVSO of HBL=

8.97*1,466,852,508
= 267,979,284,686.52

MVSO of BOP=

182.34*1,555,113,165
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16

=13949365090
Here, HBL estimation with a large market value of shares outstanding will have a decreasing
beta when the return interval is shortened. On the other hand BOP has small market value of
shares outstanding thats why having increasing beta when return interval is shortened.

Conclusion:
Stock's price variability is important to consider when assessing risk where risk as the
possibility of a stock losing its value as beta has appeal as a proxy for risk. Intuitively, it
makes sense that stock with a price that bounces up and down more than the market
because securities with large market value of shares outstanding will have estimated betas
that are biased upward, whereas securities with small market value of shares outstanding will
have estimated betas that are biased downward considered as market of arbitrary length are
biased so high market values will appear to be more risky as compare to the lower market
values so other way round we can say that it's hard not to think that stock will be riskier than
say a safe-haven utility industry stock with a low beta.
Finally because of temporal cross- correlation between securitys price movements, beta
estimates will generally depend upon the return intervals, implying that betas measured over
return intervals of arbitrary length are biased. In Particular securities with large market value
of shares outstanding will have estimated betas that are biased upward, whereas securities
with small market value of shares outstanding will have estimated betas that are biased
downward. Hence securities with relatively small market values may appear to be less risky
than they truly are, whereas securities with relatively large market values may appear to be
more risky than truly are.

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17

References

http://www.brecorder.com/market-data/karachi-stocks/
www.studyfinance.com/jfsd/pdffiles/v7n2/weinraub.pdf

J Lakonishok, AC Shapiro - Journal of Banking & Finance, 1986 Elsevier

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Roger G. Ibbotson, Paul D. Kaplan, and James D. Peterson, Estimates of Small-Stock Betas

Are Much Too Low, Journal of Portfolio Management 23, no. 4 (Summer 1997): 104111.
Meir Statman, Betas Compared: Merrill Lynch vs. Value Line, Journal of Portfolio

Management 7, no.2 (Winter 1981): 4144.

Frank K. Reilly and David J. Wright, A Comparison of Published Betas, Journal of Portfolio

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William F. Sharpe and Guy M. Cooper, Risk-Return Classes of New York Stock Exchange
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Expected Stock Returns, Journal of Finance 50, no. 2 (March 1995): 185224.
Lee, C.F., Chen, C.R. 1982. Beta Stability and Tendency: An Application of a Variable Mean
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