The Beta Values of British American Tobacco and the Petrofac. The work is to be 8 pages with three to five sources, with in-text citations and a reference page. The term ‘risk’ denotes the uncertainty associated with the return. it may be a positive return and it may be a negative return. The stock analysts and the statisticians have developed various models and tools to measure or to estimate the volatility and the returns of the market. The ‘beta’ is the most important statistics tool to measure the volatility and the Capital Asset Pricing Model (CAPM) is a popular model to calculate the return on a stock.
In this report, the beta values of the two companies will be calculated using the share prices of the last 24 months. These two companies are British American Tobacco (BATS) and the Petrofac (PFC.L) and both of them are listed in the London Stock Exchange (LSE). British American Tobacco is one of the leading tobacco companies in UK. British American Tobacco produces cigarettes under different brands and has a different price range. “Petrofac is an international provider of facilities solutions to the oil & gas production and processing industries” (Petrofac, 2010). The beta values of both the companies will be calculated using different methodologies that include covariance of the stock return with market returns and the variance of the market returns and the linear regression analysis.
For calculating the betas, the monthly stock prices of both the companies were obtained and for market return, the index FTSE 100 has been used. All these are the secondary source of data obtained through online sources. The historical stock prices of both the companies are obtained through ‘Yahoo Finance’ and the historical data of FTSE 100 is also taken from the same online source (Yahoo Finance. 2010). The calculated beta values have been compared with the beta values from the published source. The published source for betas has been taken from the online source, MSN-Money (MSN-Money, U.K. 2010.). The published betas of British American Tobacco and Petrofac are 0.47 and 1.06 respectively.
The two methodologies for beta calculation have been used. The first methodology will use the covariance of stock return with market return and the variance of the market return. The following model explains the beta (β) under the same method.