Understanding the 'BETA'

Investment in equities is marked by higher risk as compared to investment in debt or fixed income securities. Capital Asset Pricing Model (CAPM) describes the relationship between risk and the expected return on an investment. The investor needs to be compensated for the time value of money and the additional risk undertaken for investing in a risky security. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. The beta of an index measures the average volatility of the stocks comprising the index and is always equal to 1. A beta of less than 1 denotes that the security will be less volatile than the market and a beta of greater than 1 denotes that the security's price will be more volatile than the market. Stocks having a higher beta have the potential to give higher returns but they also carry a higher risk.

Analysis of 'Nifty' Stocks:

Past 12 month data of Nifty (May 2008- April 2009) reveals that the following stocks had the highest beta: Reliance Infra (1.81), Unitech (1.68), ICICI Bank (1.64), Suzlon (1.62), DLF (1.59), Reliance Capital (1.59), RCom (1.51). On the other hand stocks having the lowest beta are: Sun Pharma (0.28), Hero Honda (0.36), HUL (0.43), BPCL (0.49), ITC (0.50), CIPLA (0.52), Infosys (0.69). Traditionally, stocks with high beta, also known as momentum stocks, have given exceptional returns during bull markets. On the contrary low beta stocks, also known as defensive stocks, have given respectful returns during bear markets. One can take an investment decision by identifying the phase of the market and choosing the stocks accordingly.