Deepak Kumar Gupta

A RESEARCH REPORT ON
BETA AND MARKET CAPITALIZATION

Dissertation Submitted in partial fulfilment for the award Of
MASTER IN BUSINESS ADMINISTRATION

For Bangalore University
SUBMITTED BY DEEPAK KUMAR GUPTA
REG NO: 06XQCM6020
UNDER THE GUIDANCE OF
Dr. Nagesh Malavalli Principal
M.P.BIRLA INSTITUTE OF MANAGEMENT
ASSOCIATES WITH BHARATIYA VIDYA BHAVAN #43 RACE COURSE ROAD, BANGALORE-560001
2006-2008
DECLARATION
I hereby declare that this dissertation work entitled BETA AND MARKET CAPITALIZATION is a bonafide study, completed under the guidance and supervision of Dr. Nagesh Malavalli and submitted in partial fulfilment for the award of MASTERS OF BUSINESS ADMINISTRATION degree at Bangalore University. I further declare that this project is the result of my own effort and that it has not been submitted to any other university/institution for the award of any degree or diploma or any other similar title of recognition.
BANGALORE DATE:
DEEPAK KUMAR GUPTA Reg No: 06XQCM6020
GUIDE CERTIFICATE
I here by certify that project work embodied in the dissertation entitled is the result of an study undertaken and completed by Mr. Deepak Kumar Gupta bearing Reg No: 06XQCM6020 on BETA AND MARKET CAPITALIZATION under my guidance and supervision.
DATE: Place: Bangalore
Dr. Nagesh Malavalli Principal
PRINCIPAL CERTIFICATE
I here by certify that this project dissertation report is undertaken and completed by Mr. Deepak Kumar Gupta bearing Reg. No. 06XQCM6020 on BETA AND MARKET CAPITALIZATION under the guidance of Dr. Nagesh Malavalli Principal and Finance Professor, M P Birla Institute of Management, Bangalore.
Date: Place: Bangalore
Dr Nagesh Malavalli Principal
ACKNOWLEDGEMENT
As students collect accolades in the form of grades for the success in his/her endeavours and his/her success depends on adequate preparation and in domination and most important of all the support received from his/her guide. So the accolades I earn of this project, I would like to share with all those who have played a notable part in its making. In these two months I have worked on it, I feel indebted to many and extend my heartful gratitude and profusely thank those people who not only gave assistance to me but also participated in the making of this project. I sincerely thank to Dr. Nagesh Malavali (finance) my esteemed project guide, Prof. Santhanam (statistics) Prof. Satyanarayan (finance) for his valuable advice, assistance and guidance provided. I also remain grateful to all my friends for their assistance to prepare this project successfully.
Deepak kumar Gupta
Table of Contents
Page
Ressearch Extract
Chapter -1
2 3-10 4 4 6 8 11-15 16-20 17 17 17 18 21-56
Introduction i)Backgound of study ii)Market Capitalization iii) Beta iv)CAPM & APM
Chapter-2 Chapter-3
Review of literature Methodology i)Problem Statement ii)Research Objective iii)Study Design iv)Statical tool used
Chapter-4
Presentation and Analysis of data and interpretation
Chapter-5
Summary and Conclusion Bibliography
57-58 59
List of Graphs
Graph 1 Graph 2 Graph 3 Graph 4 Graph 5 Graph 6 Graph 7 Graph 8 Graph 9 Graph 10 Graph 11 Graph 12 Graph 13 Graph 14 Graph 15 Graph 16 Graph 17 Graph 18 Graph 19 Graph 20 Graph 21
Company Name Aditya Birla Nuvo Ltd Kotak Mahindra Bank Ltd Nestle India Ltd Tata Motors Ltd Tata Power Company Ltd Videocon Industries Ltd Jindal Steel & Power Ltd Yes Bank Ltd ABB Ltd ACC Ltd Ambuja Cements Ltd Axis Bank Ltd Asian Paints Ltd Bank of Baroda Bosch Ltd Grasim Industries Ltd Bank of India Aban Offshore Ltd Larsen & Toubro Ltd Mangalore Refinery And Petrochemicals Ltd Neyveli Lignite Corporation Ltd
Page 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
Graph 22 Graph 23 Graph 24 Graph 25 Graph 26 Graph 27 Graph 28 Graph 29 Graph 30 Graph 31
Punjab National Bank Reliance Capital Ltd Reliance Energy Ltd Siemens Ltd Tata tea Thermax Ltd Ultratech Cement Ltd Union Bank of India Mega Tata Steel Ltd
43 44 45 46 47 48 49 50 51 52
List of Tables
Table 1 Table 2 Table 3 Table 4 BETA Value of Small Cap and Mid Cap t-Test Value Beta Value of Mid Cap and Large Cap t-Test Value 53 54 55 56
Research Extract
The widely accepted capital asset pricing model (henceforth CAPM) developed by Sharpe Lintner and Mossin postulates a simple linear relationship between a stocks expected return and its risk. However, recent evidence has shown that other factors have a consistent and significant effect on common stock return. One of the most discussed relationships, and the main focus of this study, is the one between a companys size and the return on its stock. This anomaly, now known as the size effect, has been the focus of recent studies conducted by Fama and French as well as Daniel and Titman , however the seminal work was performed by Banz in 1981. His findings show that the size of a firm and the return on its common stock are inversely related. While Banzs findings were shown to be accurate and his models appear to address the possible econometric problems involved, he an not offer a theoretical foundation for this relationship. Therefore, Banz suggests that size may be a proxy for other factors that were not tested but are correlated to size. In my research objective is to find out relation between beta and market capitalization or firm size. It means during the firm size Small Cap to Mid Cap and Mid Cap to Large Cap is there any relation with beta. For finding this relation I collect 30 companies weekely average price data ,market capitalization (in Rs. Cr.) sensex index. From price and sensex data find out return of share price & market return from both data using excel find out beta value during different frim size (Small Cap,Mid Cap,Large Cap ) here I assume Small Cap market capitalization is < 2000 Cr.,Mid Cap 2000 to 10000 Cr.and Large Cap >10000 Cr. I also test the data at level of 5% significance. I found from Small Cap to Mid Cap data is significant but Mid Cap to Large Cap data is not significant. Our hypothesis is accepted during Small Cap to Mid Cap beta is related with market capitalization.
Back ground of the study Market Capitalization:

The cap is short for capitalization, which is a measure by which we can classify a company's size. Although the criteria for the different classifications are not strictly bound, it is important for investors to understand these terms, which are not only ubiquitous but also useful for gauging a company's size and riskiness Market capitalization represents the public consensus on the value of a company's equity. A corporation, including all of its assets, may be freely bought and sold through purchases and sales of stock, which will determine the price of the company's shares. Its market capitalization is this share price multiplied by the number of shares in issue, providing a total value for the company's shares and thus for the company as a whole. .
Importance:
A common misconception is that the higher the stock price, the larger the company. Stock price, however, may misrepresent a company's actual worth. If we look at two fairly large companies, IBM and Microsoft, we see that their stock prices are $29 and $22.75 respectively. Although IBM's stock price is higher, it has approximately 1.73 billion shares outstanding while MSFT has 10.68 billion. As a result of this difference, we can see that MSFT ($243.5 billion) is actually quite larger than IBM ($127.8 billion). If we compared the two companies by solely looking at their stock prices, we would not be comparing their true values, which are affected by the amount of their outstanding shares. The classification of companies into different caps also allows investors to gauge the growth versus risk potential. Historically, large caps have experienced slower growth with lower risk. Meanwhile small caps have experienced higher growth potential, but with higher risk.
What Is a Small Cap?
The meaning of "big cap" and "small cap" are generally understood by their names: big-cap stocks are shares of larger companies and small-cap stocks are shares of smaller companies. Labels like these, however, are often misleading. Small-cap stocks are often cited as good investments due to their low valuations and potential to grow into big-cap stocks, but the
definition of small cap has changed over time. What was considered a big-cap stock in 1980 is a small-cap stock today. First, we need to define "cap" which refers to market capitalization and is calculated by multiplying the price of a stock by the number of shares outstanding. Generally speaking, this represents the market's estimate of the "value" of the company; however, it should be noted that while this is the common conception of market capitalization, to calculate the total market value of a company, you actually need to add the market value of any of the company's publicly traded bonds . The market generally classifies stocks into three categories:

Small Cap under Rs.2 billion Mid Cap Rs. 2 - 10 billion Large Cap Rs.10 billion plus
Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during our evaluation.
Why Consider Small-caps?
Every successful large-cap company started at one time or another as a small business. Smallcaps give the individual investor a chance to get in on the ground floor. Imagine having had the foresight to invest in Microsoft when it was only a couple bucks a share! Another reason to invest in small caps is that most mutual funds place heavy regulations making it difficult for them to establish meaningful positions. Furthermore, it isn't uncommon form mutual funds to invest hundreds of millions in one company. Most small-cap companies don't have the market to support this size of investment. In order to buy a position large enough to make a difference to their fund's performance, a fund manager would have to buy 20% or more of the company. Individual investors who have the ability to spot promising companies can get in before the institutions do. When institutions do get in, they will do so in a big way, buying many shares and pushing up the share price. Fast growth is another reason to buy a small-cap company. It is much easier to double revenues of Rs.2 million than it is for a large company to double Rs.2 billion in revenues.
Mid Cap Mid cap refers to stocks with a market capitalization of between Rs.2 billion to Rs.10 billion. As the name implies, a mid-cap is in the middle of the pack. A mid-cap isn't too big, but at the same time has a relatively decent market cap . In a mid cap portfolio the companies are often the leaders and innovators in their Industries. They represent the future and their earnings growth potential is often Greater than that of many larger companies. They often provide hidden Opportunities and may become The Blue-Chips of Tomorrow. Investors to take a long-term view while investing in the equity markets. There is no right time to invest and it is the time one gives to their investments that matters. Investors who are comfortable with the risk-reward profile of a mid cap scheme will benefit as the smaller companies grow in size albeit with additional volatility over the years. However, investors need to keep in mind that while mid cap funds give one an opportunity to go beyond the usual large blue chip stocks, it is important to remember that mid/small cap stocks can be riskier and more volatile than established blue chip large cap stocks. Therefore, the risk level of a mid-cap fund could be higher than that of a fund seeking to invest in stocks of large well-established companies.
Beta
Risk is an important consideration in holding any portfolio. The risk in holding securities is generally associated with the possibility that realised returns will be less than the returns expected. Risks can be classified as Systematic risks and Unsystematic risks.
Unsystematic risks: These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio.
Systematic risks: These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.
Beta () is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole (most people use the Sensex Index to represent the market). Beta is
also a measure of the covariance of a stock with the market. It is calculated using regression analysis.
Beta is calculated as :
where, Y is the returns on your portfolio or stock - DEPENDENT VARIABLE X is the market returns or index - INDEPENDENT VARIABLE Variance is the square of standard deviation. Covariance is a statistic that measures how two variables co-vary. A beta of 1 indicates that the security's price will move with the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. A beta less than 1 means that it will be less volatile than the market. You can think of beta as the tendency of a security's returns to respond to swings in the market. For example, if a stock's beta is 1.2 it's theoretically 20% more volatile than the market.
Differences between Beta on Different Resources
When evaluating the different options for finding beta, you may be wondering: Which one is right? There is no right answer. There are several different methods to calculate beta. You must be aware of how the different resources calculate beta and decide which one is right for you. The following list highlights some of the major differences: Index Used Time Frame Calculation Method Historical Beta
Calculating Beta on Your Own

If you wish to have more control over how beta is calculated, can download historical prices of a security and desired index (SENSEX) using any authentic stock market site (capitaline.com, prowess.com..) and then run a regression in Excel by using slope formula.
The CAPM
This section presents a derivation of the capital asset pricing model (CAPM). The CAPmodel is a ceteris paribus model. It is only valid within a special set of assumptions. They are: Investors are risk averse individuals who maximize the expected utility of their end of period wealth. Implication: The model is a one period model. Investors have homogenous expectations (beliefs) about asset returns. Implication: all investors perceive identical opportunity sets. This is, everyone have the same information at the same time. Asset returns are distributed by the normal distribution. There exists a risk free asset and investors may borrow or lend unlimited amounts of this asset at a constant rate: the risk free rate (Rf). There is a definite number of assets and their quantities are fixed within the one period world.
All assets are perfectly divisible and priced in a perfectly competitive marked. Implication: e.g. human capital is non-existing (it is not divisible and it cant be owned as an asset). Asset markets are frictionless and information is costless and simultaneously available to all investors. Implication: the borrowing rate equals the lending rate. There are no market imperfections such as taxes, regulations, or restrictions on short selling
CAPM formula.
Re = Rf + beta (Rm Rf). In the CAPM model the beta variable is associated as systematic risk Rf = is the risk free rate, this is important because this is the rate investor could be getting for no risk. Rm = is the risk of the whole market in general Re = is the expected return incorporating the risk free rate, market risk and beta value SML which is the security market line is a graphical representation of the CAPM model. This tells us that if a security are priced accurately the expected return of the securities meets the securities beta at the security market line. However if they are below they line they are overvalued, but if they are above the line their overvalued.
Arbitrage pricing theory

APT holds that the expected return of a financial asset can be modelled as linear function of various macroeconomic factors or theoretical market indices, where sensitivity to changes in each factors is represented by a factor- specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly the asset price should equal the expected end of period price discount at the rate implied by model. If the price diverges, arbitrage should bring it back into line. If APT holds, then a risky asset can be described as satisfying the flowing relation:
Where E(rj)is the risky assets expected return, Pk is the risk premium of the factor, Rf is the risk-free rate, Fk is the macroeconomic factor, Bij is the sensitivity of the asset to factor k, also called factor loading, And j is the risky assets idiosyncratic random shock with mean zero.
Relationship with the capital asset pricing model

The APT along with the capital asset pricing model (CAPM) is one of two influential theories on asset pricing. The APT differs from the CAPM in that it is less restrictive in its assumptions. It allows for an explanatory ( as opposed to statistical) model of asset returns. It assumes that each investor will hold a unique portfolio with its own particular array of beats, as opposed to the identical market portfolio . In some ways, the CAPM can be considered a special case of the APT in that the securities market line represents a single- factor model of the asset price, where Beta is exposed to changes in value of the market. Additionally, the APT can be seen as a "supply side" model, since its beta coefficients reflect the sensitivity of the underlying asset to economic factors. Thus, factor shocks would cause structural changes in the asset's expected return, or in the case of stocks, in the firm's profitability. On the other side, the capital asset pricing model is considered a demand side model. Its results, although similar to those in the APT, arise from a maximization problem of each investors utility function, and from the resulting market equilibrium ( investors are considered to be the consumers of the assets ).
Literature Review Vijay B, AV vedpuriswar:-.Small Firm Effect in the Indian Stock Market an Empirical Study. July 2002, journal of applied finance, volume 8
Small firm effect is a phenomenon where small firms have higher returns on average than large firms. Such an anomaly would affect the pricing of capital assets.
Summary
Kiem (1983) has shown half of the small firms affect in January. The reasoning given by kiem was that the investors sell securities at the end of the year to establish short term tax losses for tax purposes this is seasonality in the stock returns, because in the new year stocks go back to the equilibrium results creating the larger returns. Fama and French (1995) extended their work to find relationship between firm size and firm earnings. They found that small firm effect is prevalent and small firms have stronger earnings than larger firms. Sehgal and Kumar (2002) done study on Indian stock market and they found that small firms have abnormal returns and more of small firms are having higher relative distress.
Data
Study limits data of BSE 500 stocks and stocks are short listed to 273 on the basis of continuously trading criteria from January 1991 to January 2002.
Methodology
In order to measure the returns monthly returns are used in the study then Two value weighted portfolios are constructed on the basis of market value one portfolio including 25 small stocks and other including 25 large stocks out of BSE 500 stocks.
Results
Results shows that the beta of the large firms are more or less equal to the market beta and priced efficiently while smaller firms beta was less than one . it may be due to poor trading of the small stocks whereby they are perceived to be less sensitive to the market movement. then
Jensen.s alpha is shows that on an average consistently outperform the market returns but larger firms generate equal or less returns than market returns.
Conclusion
The descriptive statistics suggests that an average the mean, standard deviation, skewness of small companies are higher than large firms and the result do not support the infrequent trading is the main reason behind the small firm effect and differential growth rates between small firms and large firms ,market index helps to unwind the small firm effect.
An Exploratory Investigation of the Firm Size Effect. 1985, Journal of financial economics, volume 14.
This paper investigates the firm size effect in the frame work of multi factor pricing model. The risk adjusted return between the top five percent and bottom five percent of the NYSE firms.
Summary
Empirical study of arbitrage pricing model (APT) CHAN (1981) (1983) found that firm size effect is essentially captured by the factor loading of APT. To interpret the size effect K C CHAN used the identifiable economic variables directly in a pricing equation. It is omparable with inter temporal pricing models such as those of MERTON (1973), LONG (1974) , COX,INGERSOLL & ROLL (1976) here pricing equation is called as multi factor pricing equation.
Stock market & macro economy:

Stock market reacts to changes in economic environment. Here they used variables like 1. equity weighted NYSE index 2. value weighted NYSE index 3. monthly growth rates of industrial production( IPISA ) 4. inflation 5. interest rates (T-bill) 6. A measure of change in the slope of the yield curve
Data
Investigation limits to the time period 1953-1977 and divided these 25 years into 20 overlapping intervals, like 1953 to 1958, 1954 to 1959 so on
Methodology
After ranking the portfolios according to the firm size CHAN used FAMA & MACBETH (1973) method to test the firm size effect. Then they performed the cross sectional regression of the 20 portfolios. Then 2 two types of tests are performed with the residuals. 1. Univariate analysis 2. Paired T test To see if the estimated residuals from the two extreme firm size portfolios are statically different.
Conclusions
They first explored the feasibility of a multi factor pricing equation as an explanation of the firm size effect evidence suggests that firm size anomaly is essentially captured by a multi factor pricing model .the higher average returns of smaller firms are justified by the additional risks borne in an efficient market.
Christopher James and Robert o Edmister:-.The Relationship between Common Stock Returns, Trading Activity and Market Value. September 1983, Journal of finance volume 38
This study examines the relation between common stock returns, trading activity and market value .results indicate that although firm size and trading activity are highly correlated, differences in trading activity are not the underlying reason for the firm size anomaly the finding of systematic differences in risk adjusted returns across stocks of firms different size.
Summary
Empirical research has revealed systematic differences in risk adjusted returns for the common stocks of firms of different sizes as measured by the market value of outstanding common stock BANZ (1981) , REINGANUM because of the small firm trade less frequently
than large firms ,risk measures obtained from daily or weekly returns data may seriously underestimate the risk associated with holding a portfolio of small firms. Trading activity and firm size are highly correlated however, no significant difference in mean daily risk adjusted returns is observed between portfolios of the most actively traded firms and portfolios of the least actively traded firms.
Data and Sample Selection:

Common stock returns and trading volume information for the NYSE and AMEX firms examined in this study and data were obtained from the DATA RESOURCES INCORPORATED FILE. Then 500 issues were selected for period 1975-1979 then stratified random sample was employed .to ensure that an equal number of firms from each size decile was included in the sample for each sample two measures of trading activity were calculated(1) average daily trading volume ,(2) number of trading days.
Methodology
For each of the 4 sample years 3 sets of 10 equally weighted portfolios were constructed, on the basis of market value, average daily trading volume, number of day.s the firm traded during the year. Then mean return was calculated by combining portfolio return series for each of the four years and then taking the arithmetic mean .then risk adjusted returns were calculated by subtracting from the daily return series the OLS estimate of beta times the return in market portfolio. Then F test was used whether the mean returns of the smallest firm size portfolios are equal to the mean returns on largest size portfolios.
Conclusion
Paper addresses the question of whether the firm size effect is explicable in terms of differences in trading activity between the large and small firms because of either a liquidity premium associated with small firms or a misassessment of the risk of small firms no evidence is found consistent with existence of a liquidity premium moreover ,differences in trading activity do not appear to fully explain the existence of firm size effect through bias in the estimation of beta.
Methodology
PROBLEM STATEMENT
Every companys beta is not constant every time. Time to time companys growth rate changes, growth rate effect on companies earning per share. Many variables are also effecting on share price. Many investors calculate expected earning by taking value of beta. Is value of beta effect the share price, Is there any relation between Beta and Market Capitalization ?
RESEARCH OBJECTIVES
To find out value of Beta & Market Capitalization from stock market To find out effect of beta with firm size.
STUDY DESIGN
a) Study Type: The study type is analytical, quantitative and historical. Analytical because facts and existing information is used for the analysis, Quantitative as relationship is examined by expressing variables in measurable terms and also Historical as the historical information is used for analysis and interpretation.
b) Study population: Population is the daily closing prices of share and SENSEX Index.
c) Sampling frame: Sampling Frame would be weekly closing prices of share SENSEX Index.
d) Sample: Sample chosen is daily closing values of NIFTY Index from 01-01-2001 to 10-04-2008.
e) Sampling technique:
Deliberate sampling is used because only particular units are selected from the sampling frame. Such a selection is undertaken as these units represent the population in a better way and reflect better relationship with the other variable.
SAMPLE SIZE AND DATA SOURCES

Sample: The research investigation will be limited to a sample size of 30 different sectors companies (Large Cap, Mid Cap, Small Cap). The sample size is based on simple random sampling method
Data collection tools: The data would be generated through secondary data from Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). This would be documented with meticulous care. Data collected from capitaline.com In this study SENSEX index has been considered as a proxy for the stock market and accordingly the closing index values were collected from Jan 1,2001 till April 10, 2008. Here we calculate the weekly variance from the data taken from above mentiond period .
CATEGRY OF FIRM SIZE

Small Cap : < 2000 Cr. (market Cap) Mid Cap : 2000 to 10000 Cr. Large Cap : > 10000 Cr.
HYPOTHESES
H0: No correlation between beta and market capitalization. H1: There is correlation between beta and market capitalization.
Statistical tool used:

For presentation of market capitalization used graphs and for beta value presentation used column chart hypothesis testing used t-Test by excel sheet
T-Test
The t-test assesses whether the means of two groups are statistically different from each other. This analysis is appropriate whenever you want to compare the means of two groups, and especially appropriate as the analysis for the post test-only two-group randomized experimental design.
Statistical Analysis of the t-test The formula for the t-test is a ratio. The top part of the ratio is just the difference between the two means or averages. The bottom part is a measure of the variability or dispersion of the scores. This formula is essentially another example of the signal-to-noise metaphor in research: the difference between the means is the signal that, in this case, we think our program or treatment introduced into the data; the bottom part of the formula is a measure of variability that is essentially noise that may make it harder to see the group difference. Figure 1 shows the formula for the t-test and how the numerator and denominator are related to the distributions.
Figure 1: Formula for the t-test. The top part of the formula is easy to compute -- just find the difference between the means. The bottom part is called the standard error of the difference. To compute it, we take the variance for each group and divide it by the number of people in that group. We add these two values and then take their square root. The specific formula is given in Figure 2
Figure 2. Formula for the Standard error of the difference between the means. Remember, that the variance is simply the square of the standard deviation. The final formula for the t-test is shown in Figure 3:
The t-value will be positive if the first mean is larger than the second and negative if it is smaller. Once you compute the t-value you have to look it up in a table of significance to test whether the ratio is large enough to say that the difference between the groups is not likely to have been a chance finding. To test the significance, you need to set a risk level (called the alpha level. In most social research, the "rule of thumb" is to set the alpha level at .05. This means that five times out of a hundred you would find a statistically significant difference between the means even if there was none (i.e., by "chance"). You also need to determine the degrees of freedom (df) for the test. In the t-test, the degrees of freedom is the sum of the persons in both groups minus 2. Given the alpha level, the df, and the t-value, you can look the t-value up in a standard table of significance (available as an appendix in the back of most statistics texts) to determine whether the t-value is large enough to be significant. If it is, you can conclude that the difference between the means for the two groups is different (even given the variability). Fortunately, statistical computer programs routinely print the significance test results and save you the trouble of looking them up in a table. Null hypothesis is accepted if the T test value is less than t-statistcs value otherwise null hypothesis is rejected
Graph 1
(In Rs. Cr.)
Till 17/12/2004 company is in Small Cap during 17/12/2004 to 24/11/2006 it is in mid cap after this company becomes a large cap market capitalization
Interpretation During Small Cap beta is 0.39269, in Mid Cap beta increase to 0.688571 and in large Cap beta is 0.433499
Graph 2
(In Rs. Cr.)
Till 03/10/2003 company is in Small Cap during 03/10/2003 to 11/08/2006 it is in mid cap after this company becomes a large cap market capitalization
Interpretation During Small Cap beta is 0.784003, in Mid Cap beta decrease to 0.717759 and in large Cap beta is 0.985093
Graph 3
(In Rs. Cr.)
Till 10/02/2006 company is in mid Cap after this company becomes a large cap market capitalization.
Interpretation During Mid Cap beta is 0.102955 and in large Cap beta is 0.251509
Graph 4
(In Rs. Cr.)
Till 19/10/2001 company is in Small Cap during 19/10/2001 to 26/09/2006 it is in Mid Cap after this company becomes a Large Cap market capitalization.
Interpretation During Small Cap beta is 0.415687, in Mid Cap beta increase to1.065172 and in large Cap beta is 0.686199
Graph 5
(In Rs. Cr.)
Graph 6
(In Rs. Cr.)
Graph 7
(In Rs. Cr.)
Graph 8
(In Rs. Cr.)
Till 06/01/2006 company is in Small Cap after this company becomes a Mid Cap market capitalization.
Interpretation During Small Cap beta is 0.499414, in Mid Cap beta increase to 0.914258
Graph 9
(In Rs. Cr.)
Graph 10
(In Rs. Cr.)
Till 30/12/2005 company iss in Mid Cap after this company becomes a Large Cap market capitalization.
Graph 11
(In Rs. Cr.)
Till 02/11/2005 company is in in Mid Cap after this company becomes a Large Cap market capitalization.
Graph 12
(In Rs. Cr.)
Graph 13
(In Rs. Cr.)
Till 08/01/2002 company is in Small Cap during 08/03/20032to 26/10/2007 it is in Mid Cap after this company becomes a Large Cap market capitalization.
Interpreation During Small Cap beta is 0.191247, in Mid Cap beta increase to 0.23007 and in large Cap beta is 0.351418
Graph 1 4
(In Rs. Cr.)
Graph 1 5
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.277884, in Mid Cap beta increase to 0588698 and in large Cap beta is 0.273424
Graph 16
(In Rs. Cr.)
Till 02/01/2004 company is in Mid Cap after this company becomes a Large Cap market capitalization.
Interpretation During Small Cap beta is 0.417145, in Mid Cap beta increase to 0.706879
Graph 17
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.417523, in Mid Cap beta increase to 1.090613 and in large Cap beta is 0.0.595871
Graph 18
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.363651., in Mid Cap beta increase to 0.736648 and in large Cap beta is 0.689348
Graph 19
(In Rs. Cr.)
Graph 20
(In Rs. Cr.)
Interpretation During Mid Cap beta is-0.01558 and in large Cap beta is 0.0.123047
Graph 21
(In Rs. Cr.)
Interpretation
During Small Cap beta is 0.612648, in Mid Cap beta increase to 1.241664 and in large Cap beta is 0.57405
Graph 22
(In Rs. Cr.)
Interpretation
During Small Cap beta is 0934142, in Mid Cap beta decrease to 0.844749 and in large Cap beta is 0.695043
Graph 23
(In Rs. Cr.)
Interpretation
During Small Cap beta is 0.761415, in Mid Cap beta increase to 1.056705 and in large Cap beta is 1.124859
Graph 24
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.462191 in Mid Cap beta is 0.761331
Graph 25
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.412303, in Mid Cap beta increase to 0.52113 and in large Cap beta is 0.627026 Graph 26 (In Rs. Cr.)
Interpretation During Small Cap beta is 0.578768, in Mid Cap beta is 0.578921 Graph 27 (In Rs. Cr.)
Interpretation
During Small Cap beta is 0.583434, in Mid Cap beta is 0.537679
Graph 28
(In Rs. Cr.)
Interpretation
During Small Cap beta is 0.737854, in Mid Cap beta is 0.3403
Graph 29
(In Rs. Cr.)
Interpretation During Small Cap beta is 0.430009, in Mid Cap beta increase to 886332 and in large Cap beta is 0.878786 Graph 30 (In Rs. Cr.)
Interpretation During Small Cap beta is 0.377851, in Mid Cap beta increase to 0.52113 and in large Cap beta is 0.0.665401 Graph 30 (In Rs. Cr.)
BETA Value during Small Cap & Mid Cap

Company Aditya Birla Nuvo Ltd Kotak Mahindra Bank Ltd Tata Motors Ltd Tata Power Company Ltd Videocon Industries Ltd Jindal Steel & Power Ltd Yes Bank Ltd ABB Ltd Axis Bank Ltd Asian Paints Ltd Bank of Baroda Bosch Ltd Grasim Industries Ltd Bank of India Aban Offshore Ltd Neyveli Lignite Corporation Ltd Punjab National Bank Reliance Capital Ltd Siemens Ltd Tata Tea Ltd Thermax Ltd Union Bank of India Small Cap
Table 1
Mid Cap
0.39269 0.784003 0.415687 0.952363 0.36754 1.023907 0.499414 0.469798 0.527826 0.191247 0.688394 0.277884 0.417145 0.417523 0.363651 0.612648 0.934142 0.761415 0.412303 0.578768 0.583434 0.430009
0.688571 0.717759 1.065172 0.659383 0.462269 0.773546 0.914258 0.46609 0.835481 0.23007 0.86612 0.588698 0.706879 1.090613 0.736648 1.241664 0.844749 1.056705 0.521123 0.578921 0.537679 0.886332
Industry :Diversified - Mega
0.377851
0.665401
Table 2 t-Test: Two-Sample Assuming Unequal Variances Variable Variable 1 2 0.744962 0.542593 0.049023 0.056143 23 23 0 44 2.99275 0.00226 1.68023 0.004521 2.015367
Mean Variance Observations Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail
Interpretation
Here t -Test Statical value is 2.99275 that is grater than t -Critical value 2.015367 It means our null hypothesis is rejected and our hypothesis is accepted at level of
significance 5% data is significant. So I can say that beta value is effecting firm size.
Beta value at Mid Cap & Large Cap

Company Aditya Birla Nuvo Ltd Kotak Mahindra Bank Ltd Nestle India Ltd Tata Motors Ltd Tata Power Company Ltd Videocon Industries Ltd Jindal Steel & Power Ltd ABB Ltd ACC Ltd Ambuja Cements Ltd Axis Bank Ltd Asian Paints Ltd Bank of Baroda Bosch Ltd Grasim Industries Ltd Bank of India Essar Oil Ltd Aban Offshore Ltd Larsen & Toubro Ltd Mangalore Refinery And Petrochemicals Ltd Neyveli Lignite Corporation Ltd Punjab National Bank Reliance Capital Ltd Mid Cap
Table 3
Large Cap
0.688571 0.717759 0.102955 1.065172 0.659383 0.462269 0.773546 0.46609 0.58844 0.477272 0.835481 0.23007 0.86612 0.588698 0.706879 1.090613 0.998781 0.736648 0.034178 -0.01558 1.241664 0.844749 1.056705
0.433499 0.985093 0.251509 0.686199 0.409965 0.689261 0.868477 0.558339 0.63941 0.5424 0.410824 0.351418 0.578279 0.273424 0.655428 0.595871 0.689348 0.49523 0.704817 0.123047 0.57405 0.695043 1.124859
Reliance Energy Ltd Siemens Ltd UltraTech Cement Ltd Union Bank of India Tata Steel Ltd
0.462191 0.521123 0.737854 0.886332 0.211662
0.761331 0.627026 0.34303 0.878786 0.150456
Table 4 t-Test: Two-Sample Assuming Equal Variances Variable 1 0.644129 0.106139 28 0.081458 0 54 0.907951 0.183969 1.673566 0.367938 2.004881 Variable 2 0.574872 0.056778 28
Mean Variance Observations Pooled Variance Hypothesized Mean Difference Df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail
Interpretation
Here t-Test statical value is 0.907951 that is less than t critical value 2.004881 at the 5% level of significance the evidence supporting this relationship is extremely weak.
Summary & Conclusion

Smaller firms (in terms of market value of equity) earn higher returns than larger firms of equivalent risk, where risk is defined in terms of the market beta. Small firm beta is higher than mid cap. Large companies are retaining a smaller percentage of their earnings than the small companies . A small company is more likely to reinvest its earning back into the company causing the retain earning to grow faster and increasing the value of stock. Aslo small firm not traded daily so its beta is volatile and in Large Cap firm many player trades so its beta is near to market beta. In first test Small Cap to Mid cap by t- Test statics value is grater than table value our hypothsis is accepted means there is some relation between beta and market size. In second case Mid Cap to Large Cap t-Test value is less than table value, the evidence supporting this relationship is extremely weak at 5% level of significance. There may be some reason to not supported strongly relationship with Large Cap one reason may be my assumption for categories large cap is more than 10000 Cr. Capitalization but today scenario should be more 50000 cr. Therefore here no difference between mid cap and large cap. There are several contributing factors and earnings distribution may only be one of them. This factor can be analyzed further to see how much of the size effect it accounts for. Once that is established other theories can be approached in a similar manner in hopes of fully explaining the size effect.
Books
Statistical methodsFundamental of statics Portfolio ManagementLevin and Rubin , S.C.Gupta Prassana Chandra
Financial Management Prassnna Chandra
Internet Website
www.capitaline.com www.prowess.com www.google.com www.encyclopedia.com www.jstor.com
References
Christopher James and Robert o Edmister:-.The Relationship between Common Stock Returns, Trading Activity and Market Value. September 1983, Journal of finance volume 38 K.C Chan:-.An Exploratory Investigation of the Firm Size Effect. 1985, Journal of financial economics, volume 14. Vijay B, AV vedpuriswar:-.Small Firm Effect in the Indian Stock Market an Empirical Study. July 2002, journal of applied finance, volume 8

Deepak Kumar Gupta

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A RESEARCH REPORT ON

BETA AND MARKET CAPITALIZATION

MASTER IN BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF

Dr. Nagesh Malavalli Principal

M.P.BIRLA INSTITUTE OF MANAGEMENT

DEEPAK KUMAR GUPTA Reg No: 06XQCM6020

DATE: Place: Bangalore

Dr. Nagesh Malavalli Principal

Date: Place: Bangalore

Dr Nagesh Malavalli Principal

Deepak kumar Gupta

2 3-10 4 4 6 8 11-15 16-20 17 17 17 18 21-56

Presentation and Analysis of data and interpretation

Summary and Conclusion Bibliography

Back ground of the study Market Capitalization:

What Is a Small Cap?

Differences between Beta on Different Resources

Calculating Beta on Your Own

Arbitrage pricing theory

Relationship with the capital asset pricing model

Stock market & macro economy:

Data and Sample Selection:

SAMPLE SIZE AND DATA SOURCES

CATEGRY OF FIRM SIZE

Statistical tool used:

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

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(In Rs. Cr.)

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(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

(In Rs. Cr.)

During Small Cap beta is 0.583434, in Mid Cap beta is 0.537679

(In Rs. Cr.)

During Small Cap beta is 0.737854, in Mid Cap beta is 0.3403

(In Rs. Cr.)

BETA Value during Small Cap & Mid Cap

Industry :Diversified - Mega

Beta value at Mid Cap & Large Cap

0.462191 0.521123 0.737854 0.886332 0.211662

0.761331 0.627026 0.34303 0.878786 0.150456

Summary & Conclusion

Financial Management Prassnna Chandra