Beta and its importance in investment models
The overall assignment mainly focuses in providing and analysing the beta of WH Smith PLC from February 2014 to 31st Jan 2017. In addition, the study also aims in analysing the impact of beta it could be used by investors in their decision making process. Furthermore, the difference between calculated and registered beta, which could be found in websites such as Ft.com is also discussed. The performance of the company and comparison with FTSE 250 index is also conducted to analyse growth obtained by the company in the fiscal years. Furthermore, short term and long term return performance of the company is also well, which can help investors get long term and short-term trend of the company.
Beta is mainly considered one of the essential valuation systems that help in pinpointing risk faced by investors while conducting investments in a particular security. Beta has been used in many investment models for identifying the risk involved in trading. Afonso and St Aubyn (2016) stated that use of beta allows the CAPM model to determine the expected return expected from the company due to the risk involved in investments. On the other hand, Alti and Tetlock (2014) argued that during financial crisis Beta mainly loses its friction as adequate research evaluation could not be conducted. Beta is mainly determined to be one of the components, which allow investors to compare the price movement of volatility of stock in accordance with capital market movement. There are two different types of Beta valuation firstly individual secondly related to the market. Individual beta evaluation is only related to the share price movement of the company. However, the market related beta mainly allows investors to detect the price for fluctuations attained by the company period. CAPM model mainly uses the beta to determine whether the return should be higher according to the risk of faced by the company. Moreover, the same data is also used in dividend discount model to determine the relevant share price that must be maintained by the company according to its dividend pay. Ambler and Alexander (2015) stated that use of adequate beta allows investors to go into the investment condition and make adequate to improve its financial Returns.
|
Particulars |
Value |
|
Derived Beta |
1.0018 |
|
FT.com Beta |
0.5387 |
Table 1: Depicting the two different beta assumption of the same stock
(Source: as created by the author)
With help of the above table both derived beta and beta determined from Ft.com could be identified. It could be understood that the calculated beta is much higher than the beta depicted in fb.com. This difference in overall beta derivation is mainly due to the time taken for analysis. The derived beta has mainly used 3 years of the return from both WH Smith PLC and FTSE 250. However, the beta drawn by the ft.com only comprises of data for one year this mainly change to the overall risk of the investors (Berk and Van Binsbergen 2016). Furthermore, the websites mainly use a minor period beta, as it helps in pinpointing actual and current risk associated with the investment. However, the derived beta is determined to understand the long-term risk, which needs to be accompanied during investment scheme. There is a relative difference between derived and depicted beta and thus investors need to conduct effective evaluation before investments. Andonov, Bauer and Cremers (2016) stated that determination of Beta is one of the ascension investments as it allowed to conduct both CAPM and dividend discount model.
Comparison of calculated and registered beta
Seeing the overall beta, which has been derived from calculation and from the website it could help in detecting the magnitude of the implication it has on investor’s decision. Moreover, the derived or calculated beta is mainly at 1.0018, which indicates that the stock is highly risky and volatile. Any price fluctuations in the capital market could result in high price movement of the stock. However, to beta from Ft.com is really at 0.537, which depicts less volatile to the price affected by capital market. Derivation of the beta is essential for the investors to make adequate investment decisions regarding future price fluctuations of a company (Hoffmann and Post 2014). The company mainly performed well in the market and provided an effective return from shares. Nevertheless, Bali, Brown and Caglaya (2014) argued that during the financial crisis beta in determining the investment is futile as the whole market is being defecated. Accompanied with the help of overall beta investors are able to determine the risk associated with its share price movement. On the other hand, investors uses beta to calculate the dividend discount model, CAPM model and other relevant investment models to understand the minimum return, which is going to be provided by the company.
After seeing the above figure overall comparison could be conducted regarding the performance comparison of FTSE 250 and WH Smith PLC. Seeing the overall returns of FTSE 250 it could be understood that WHS provides higher return in comparison to the index. The line graph provided in the above figure mainly helps in understanding the relative income generated by WHS when FTSE 250 started to move from 2014 to 2017. It can be seen that the returns of FTSE 250 is within confinement of WHS returns this indicates that the beta of the company is highly volatile. As market moves in any direction so does its price, which could be used by investors as an effective investment strategy. Return comparison is relatively difficult, as FTSE 250 is a composition of 250 companies while WHS returns are directly related to the price movement of the index. Thus, in comparison to the FTSE 250 return the return of WHS is relatively higher. Levine (2016) stated that the use of overall strategy allows investors to detect the actual return generation capacity of a company. On the other hand, Kamstra et al. (2017) strategies used for investment could backfire if the investor regarding sensitivity and volatility of the stock does not conduct adequate back testing.
Performance analysis of WH Smith PLC
After seeing the stock returns, which is depicted in the above 2 figures relevant trend could be identified. Long-term performance from the long-term share price graph the prices of the company, the price started to rise from 1000 level and reached above 1800 level. This Increment in the overall price of WHS mainly states the long-term performance of the company. If an investor invested 10 share at the price level of 1000, his total investment would be 10000 dollar. However, after reaching at the level of 1800 in the investor would sell the shares this will provide return of $8,000, which is almost, doubled investment conducted by the investor. This relevant increment in the share price affects the long-term performance of the company (Lopez-de-Silanes, Phalippou and Gottschalg 2015).
However, the short-term trend of WHS is relatively higher, where it is just for the duration of 2 months. The price level mainly started from 1650 levels to 1750 levels. The stock price gained more than 150 from an investment. The rising price levels of the company immediate effect its short-term trend, which could be used by investors in improving the overall investment scope (Munnell, Aubry and Crawford 2015).
Moreover, operations of long term and short-term performance of the company could be understood that in long run the company is entering a consolidation mode while in the short run the company still in an uptrend. Thus, it could be understood that the short-term price movement has a relatively low income than the price movement of the company. Furthermore, if investors invested in stocks during the 2014 investment date and sold the shares in 2017 date then it could have gained a total return of 57.79%, whereas the return generated from short-term trade could only provide 8.13%. Thus, in comparison to long term short-term performance of the company is not adequate (Zabarankin, Pavlikov and Uryasev 2014).
Conclusion:
The overall evaluation of the assignment mainly stated the return generation capacity of WHS from 2014 to 2017. In addition, return of the company was relatively effective as provided higher returns on the fiscal year. The company mainly outperformed the FTSE 250 by providing a higher return from investment. Howeve, it company is relatively high, which indicates the volatility that could be seen in return provided in the assignment. The identification of the impact of Beta could eventually help investors determine the relevant value of the investment conducted in WHS. The company in the end as provided adequate returns and supported the investors with exponential growth in share price. However, in the short-term the company is overall integration capacity has slowed due to the consolidation conducted in the end.
Reference:
Afonso, A. and St Aubyn, M., 2016. Economic Growth and Public and Private Investment Returns.
Alti, A. and Tetlock, P.C., 2014. Biased beliefs, asset prices, and investment: A structural approach. The Journal of Finance, 69(1), pp.325-361.
Ambler, S. and Alexander, C.R., 2015. One Percent? For Real? Insights from Modern Growth Theory about Future Investment Returns.
Andonov, A., Bauer, R. and Cremers, M., 2016. Pension fund asset allocation and liability discount rates.
Bali, T.G., Brown, S.J. and Caglayan, M.O., 2014. Macroeconomic risk and hedge fund returns. Journal of Financial Economics, 114(1), pp.1-19.
Berk, J.B. and Van Binsbergen, J.H., 2016. Assessing asset pricing models using revealed preference. Journal of Financial Economics, 119(1), pp.1-23.
Hoffmann, A.O. and Post, T., 2014. Self-attribution bias in consumer financial decision-making: How investment returns affect individuals’ belief in skill. Journal of Behavioral and Experimental Economics, 52, pp.23-28.
Kamstra, M.J., Kramer, L.A., Levi, M.D. and Wermers, R., 2017. Seasonal asset allocation: Evidence from mutual fund flows. Journal of Financial and Quantitative Analysis, 52(1), pp.71-109.
Levine, J.A., 2016. The Baetylus Theorem—the central disconnect driving consumer behavior and investment returns in Wearable Technologies. Technology and investment, 7(3), p.59.
Lopez-de-Silanes, F., Phalippou, L. and Gottschalg, O., 2015. Giants at the gate: Investment returns and diseconomies of scale in private equity. Journal of Financial and Quantitative Analysis, 50(03), pp.377-411.
Munnell, A.H., Aubry, J.P. and Crawford, C.V., 2015. Investment returns: Defined benefit vs. defined contribution plans. Issue In Brief, (15-21).
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517
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