The Hindu Business Line : Tech Tools

Please explain how to calculate Alpha and Beta value of shares and where to get the data to calculate those. Also explain convergence, divergence and exponential moving averages and the significance of these indicators in identifying good sectors for investment. N. Venkatachalam.

What is meant by High Beta stock? M.S. Nair

The beta value of a share measures the correlation between that share and any index (Sensex is commonly used to calculate beta values in India). It denotes the sensitivity of the stock to the moves made by the overall market. A beta of 1 is said to be neutral. A beta above 1, say 1.2 is said to be highly correlated. A 10 per cent move in the Sensex would then translate into a 12 per cent move in that particular stock.

Similarly, beta value of less than 1 would mean that the stock is less susceptible to the sharp moves made by the market. Certain sectors such as the pharmaceutical sector in India have low beta value. They lose much less in a market's fall. Sectors such as capital goods, engineering, telecom and certain pivotals such as Reliance, SBI and Tata Steel have high beta values.

The investor can take position in high-beta stocks if the outlook is bullish. In case the market seems likely to lose ground, investors can buy into low-beta stocks.

The beta value of a stock is obtained by regression analysis. Most technical analysis software available in India have the beta oscillator among the list oscillators. There is, thus, no need for you to calculate it manually.

The concept of Alpha is commonly used to measure a fund manager's performance. Simple moving averages are constructed by taking the average of `n' number of data points. Exponential moving averages use weighting factors that decrease exponentially. Their function is to average the price over a period of time and thus give us entry and exit points as the price crosses above the average line or moves below the average line. Again, most technical analysis software can plot exponential moving averages. So there is no need to calculate this average manually.

Convergence and divergence in lay terms mean moving nearer or moving away of two variables. In technical analysis, the terms convergence and divergence is mostly used in relation to two moving averages. The gap between two moving averages is used as an oscillator to give `buy' and `sell' signals. This oscillator is commonly known as MACD (moving averages convergence divergence).

Lokeshwarri S.K.

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