Analysis of Beta of IMAX Corporation and Amazon.com, Inc.
Beta is a measure of volatility. Anyone wishing to invest in Imax Corporation and Amazon, Inc. stock would want to evaluate the volatility of the price of their stock. Volatility is the extent to which the price of the stock is exposed to market risk. A better way to understand the volatility of the two stocks is by analyzing their beta. A stock with a beta above one is considered more exposed to market risk, while a beta of less than one implies that the price of that particular stock is either less exposed to market or it is uncorrelated with the larger market (Bosch-Badia et al. 17). Apart from measuring the systematic risk of a stock, beta is also used in the Capital Asset Pricing Model (CAPM) in the calculation of the expected return of an asset based on its beta value and the expected market returns (Terregrossa & Eraslan 13). Beta is also referred to as the beta coefficient of an asset investment.
Beta is calculated by regressing the stocks response to the market. For instance, a stock with a beta value of 1.4 implies that the stock is 40% more volatile than the market. The formula for calculating beta is;
Cov (RaRb) is the Covariance of the asset and that of the market, and;
Var (Rb) is the Variance of market.
The size of beta for a specific stock is determined by a number of factors that can be categorized into three: nature of the business, its operating leverage, and its financial leverage. Under the nature of the business, it is expected that firms with cyclical operations have higher beta than companies with steady operation throughout the year. Companies that produce discretional products tend to have a higher beta, while those dealing with basic commodities have a relatively low beta (Xiao 6). Under the operating leverage category, companies with higher fixed cost have higher beta values than those with relatively low fixed costs (6). Under the financial leverage category, companies that borrow more at a higher frequency have a higher beta (7). The following excel sheet shows the calculation of the current beta values for Imax Corporation and Amazon Incorporation based on their specific stock exchange markets.
The beta value of IMAX Corporation and Amazon Incorporation for the month ended 1st of February, 2019 is 1.91 and 1.41 respectively. This implies that IMAX Corporation and Amazon Incorporation are 91% and 41% more volatile than the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) markets respectively. In addition, the current beta values for the two companies are higher compared to their three-year historical beta values, indicating that their current exposure to market risk is higher than the last three-years’ average. If the respective stock markets went up 10% today, the Imax Corporation stock should move up by 19.1% (1.91 x 10), while that of Amazon Incorporation should move up by 14.1% (1.41 x 10).
Rate of Return, Average, and the Standard Deviation Statistics for IMAX Corp. and Amazon Inc.
The following excel sheet shows the calculation of Rate of Return, Average, and the Standard Deviation for IMAX Corporation and Amazon Incorporation based on their specific stock exchange markets. The expected rate or return is calculated as (Today’s Price / Yesterdays Price) – 1. The average is the sum of all the adjusted closing prices divided in the number of days under consideration. Standard deviation is the square root of the variance of the adjusted closing prices divided in the number of days under consideration.
Bosch-Badia, Maria-Teresa, et al. “Analysing Assets’ Performance inside a Portfolio: From Crossed Beta to the Net Risk Premium Ratio.” Cogent Economics & Finance, edited by David McMillan, vol. 5, no. 1, Jan. 2017, doi:10.1080/23322039.2016.1270251.
Terregrossa, Salvatore J., and Veysel Eraslan. “An Analysis of the Relation between Return and Beta for Portfolios of Turkish Equities.” Cogent Economics & Finance, edited by David McMillan, vol. 4, no. 1, Cogent, Apr. 2016, doi:10.1080/23322039.2016.1168501.
Xiao, Bing. “Beta and Size Revisited: Evidence from the French Stock Market.” International Journal of Financial Research, vol. 7, no. 5, 2016, pp. 42–50, doi:10.5430/ijfr.v7n5p42.