2019-01-25T10:19:44+00:00 Assignments

ALLIANCE TRUST PLC BETA ANALYSIS

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ALLIANCE TRUST PLC BETA ANALYSIS

Alliance Trust PLC Beta Analysis

The beta of an entity indicates the level of systematic risks or volatility of a stock as compared to the entire market (Hood & Lee, 2011). The beta of a stock can be looked at as the tendency of this stock return to respond to the market stock market swing. When an entity stock has a beta of one, it indicates that its price will move along with the market. On the other hand, when the company has a beta of less than one, it indicates  that it will have a lesser volatility compared to the market while  a beta of greater than one indicates higher level of stock price volatility as compared to the entire stock market (Volkmann, Tokarski & Grünhagen, 2010). The beta of a company can change through the time depending on the market direction, and it is not a complete measure of the company risk.

Alliance Trust PLC has a calculated beta of 0.65. This indicates that on average, the company has 0.65 times the total market return. The beta is obtained as using the covariance between the stock market (as represented by the FTSE) and the stock of the Alliance Trust PLC. However, the calculated beta of the company   is less than the published beta for the company on Reuters, which is 0.85 (Reuters, 2015). However, both betas indicate less volatility that the FTSE benchmark index. The return of the Pearson product moment correlation coefficient (coefficient of determination) is 0.08. This means that the calculated beta is not a very reliable measure of risk, because the rule of the thumb of r-squared considers the most reliable figure to be as close to one as possible. The difference value of the two betas (published in the Reuters and calculated) can be accounted for by many factors.

The difference in time used for the calculation of the beta features as one of the factors. The Reuters calculation of the beta does not indicate the time frame that is considered for calculating the beta. The time frame considered in the calcula…………………..



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