Investors extensively use Technical Analysis and Fundamental analysis for finding stocks for investment purposes. They often use nothing but intuition for the same purpose. At the end of the day their balance sheet always shows a Debit balance. Investors normally complain about their stock selection, entry levels and off course their exit levels.
Here we are discussing on Beta relationship of a stock with Nifty, which is extensively adopted for stock selection by researchers and scholars. Beta describes how the expected return of a stock is correlated to the return of the Index. If an Asset has beta of 0 means that the price is not correlated with Index; we can say that the Asset is independent in nature. If an Asset has a positive Beta then it follows the Index. If an Asset has negative Beta, means it is inversely correlated with the market. A stock will always have a correlation, at the same time it will have industry wise correlation and will have high correlation under the same management of a group of companies.
Beta can be estimated for individual companies using regression analysis against a stock market index. Study of Beta helps Fund managers extensively for diversification of their portfolios.
If a stock has a beta of 1.75, it means that if the Nifty returns during the year is 10%, then the stock return would be around 17.5%. If the beta of a stock is .75 and Nifty has given a monthly return of 20%, investment on that particular stock will fetch only 15%. Here what would like to convey is that in a bull market, investors would select high beta stocks for investments. In a bear market it is advisable to reduce high beta stocks from the portfolio. Stocks which are cyclical in nature have low betas. Defensive sectors like Pharma and FMCG sector stocks will also normally have low betas. New generation stocks generally come under the sector of high beta.
Among Sensex stocks Reliance Infra, Unitech, DLF and Reliance Capital are having high betas. So it is prudent to buy these stocks during a bull market, at least these stocks should be avoided for shorting.
The following table illustrates the Beta factor of Nifty stocks and Junior Nifty stocks.
Here we are discussing on Beta relationship of a stock with Nifty, which is extensively adopted for stock selection by researchers and scholars. Beta describes how the expected return of a stock is correlated to the return of the Index. If an Asset has beta of 0 means that the price is not correlated with Index; we can say that the Asset is independent in nature. If an Asset has a positive Beta then it follows the Index. If an Asset has negative Beta, means it is inversely correlated with the market. A stock will always have a correlation, at the same time it will have industry wise correlation and will have high correlation under the same management of a group of companies.
Beta can be estimated for individual companies using regression analysis against a stock market index. Study of Beta helps Fund managers extensively for diversification of their portfolios.
If a stock has a beta of 1.75, it means that if the Nifty returns during the year is 10%, then the stock return would be around 17.5%. If the beta of a stock is .75 and Nifty has given a monthly return of 20%, investment on that particular stock will fetch only 15%. Here what would like to convey is that in a bull market, investors would select high beta stocks for investments. In a bear market it is advisable to reduce high beta stocks from the portfolio. Stocks which are cyclical in nature have low betas. Defensive sectors like Pharma and FMCG sector stocks will also normally have low betas. New generation stocks generally come under the sector of high beta.
Among Sensex stocks Reliance Infra, Unitech, DLF and Reliance Capital are having high betas. So it is prudent to buy these stocks during a bull market, at least these stocks should be avoided for shorting.
The following table illustrates the Beta factor of Nifty stocks and Junior Nifty stocks.
