Question

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

Month	Month end Price	KSE 100 INDEX
Jan	175	32600
Feb	185	33900
March	152	33500
April	190	34000
May	195	33500
June	188	33800
July	190	33700
Aug	195	33200
Sep	190	32900
Oct	185	33100
Nov	190	33900
Dec	88	34100

1. Calculate average return for both stock and market
2. Calculate Standard deviation for both
3. Calculate coefficient of variation for both
4. Calculate Beta of stock
5. Suggest what you understand from Beta

Answer 1

Step 1: For both Tee Co. and KSE 100, we calculate the percentage change in prices using the formula -

(Current price - Last month price)/Last month Price

Month	Tee Co.	KSE 100	%age change Tee Co.	%age change KSE 100
Dec	88	34100	-53.68%	0.59%
Nov	190	33900	2.70%	2.42%
Oct	185	33100	-2.63%	0.61%
Sept	190	32900	-2.56%	-0.90%
Aug	195	33200	2.63%	-1.48%
July	190	33700	1.06%	-0.30%
June	188	33800	-3.59%	0.90%
May	195	33500	2.63%	-1.47%
April	190	34000	25.00%	1.49%
March	152	33500	-17.84%	-1.18%
Feb	185	33900	5.71%	3.99%
Jan	175	32600	#DIV/0!	#DIV/0!

Step 2: Calculating the average price for both Tee Co. and Market price

Using excel AVERAGE function , Tee Co. average Return = AVERAGE(%age change in stock price values from Jan to Dec)

KSE 100 average Return = AVERAGE(%age change in values from Jan to Dec)

Month	%age change Tee Co.	%age change KSE 100
Dec	-53.68%	0.59%
Nov	2.70%	2.42%
Oct	-2.63%	0.61%
Sept	-2.56%	-0.90%
Aug	2.63%	-1.48%
July	1.06%	-0.30%
June	-3.59%	0.90%
May	2.63%	-1.47%
April	25.00%	1.49%
March	-17.84%	-1.18%
Feb	5.71%	3.99%
Jan
AVERAGE	-3.69%	0.42%

Step 3: Standard Deviation is calculated by using excel STDEV.P function

For Tee Co. = STDEV.P(%age returns from Jan to Dec)

For KSE 100 = STDEV.P(%age returns from Jan to Dec)

Month	%age change Tee Co.	%age change KSE 100
Dec	-53.68%	0.59%
Nov	2.70%	2.42%
Oct	-2.63%	0.61%
Sept	-2.56%	-0.90%
Aug	2.63%	-1.48%
July	1.06%	-0.30%
June	-3.59%	0.90%
May	2.63%	-1.47%
April	25.00%	1.49%
March	-17.84%	-1.18%
Feb	5.71%	3.99%
Jan
STDEV	0.1848	0.0166

Step 4: Covariance is calculated by using excel Covariance function

COVARIANCE.P(%age returns of Tee Co. , %age returns of KSE 100)

So, Covariance = 0.0006

Step 5: Calculating the Beta. Using excel slope function

SLOPE(%age returns of Tee Co. , % returns of KSE 100)

Beta = 2.07

A beta of 2.07 shows that Tee Co. stocks are twice as volatile than the market returns. If market return is 10%, then Tee Co. stock return is approx 20%. Similarly , is market return falls 10%, Tee Co. stock will fall 20%