Beta of Equity Aneka Tambang Tbk

Beta of Equity
Beta is the sensitivity of the stock return to the return of the market portfolio. In another words, Beta is used to measure the change in stock return when there is a change in the market return. And in this company the Beta was calculated as 1.32527437 with the market using LQ45. Also, in correspondence to the IHSG index, the Beta is 1.56238798. That means if the market return in IHSG is increased by 1% then stock return would increase by 1.3% for LQ45, and for the IHSG the increase of 1% of market return would increase stock return of the company by 1.5%.
So this company is quite the right place for risk seeker to invest their money in, since it could be classified as an aggressive stock company (Beta more than 1.0- average) but for those that does not enjoy risk or want to play it safe, it would be best not to put all of your money in this company, Although, a good investor would invest not only in one place but in several places. So in other words, do not put all your money in one basket since you might lose them and be left with nothing.
Even given Beta 1.5 it literally means that every movement in market is followed by stock return. There are some cases that we can see in the scatter plot showing that stock return has e opposite movement from the market return. When the market is increasing because special events that occurred that day, the stock return was increasing with the value greater than 1.5 and vice-versa.
Hypothesis testing of regression
Based on CAPM (Cost Asset Pricing Model), risk premium equal to the stock’s beta times the market risk premium. Therefore,
Market risk premium = market return – risk-free interest rate
Expected return on stock = risk-free interest rate + (beta * market risk premium)
r = rf + β (rm – rf )
From the data, we get average stock return 0.0129%. This value would be used to test whether the formula above accepted or not.
H0 = r = 0.0129%
Ha = r ≠ 0.0129%
For significant level = 5% (0.05)
Z0.05 = 1.96
H0 rejected if Z*> -1.96 or Z* < 1.96
Using LQ45-ANTM data
For β = 1.325274376, and rf ranged between 6.5% - 9.5% (changed from 2008-2010), expected return value is 0.010%.
Z* = (0.010% - 0.0129%) / 3.281% = -0.00086808
Since Z*< 1.96 and Z* > -1.96, H0 accepted
Using IHSG-ANTM data
For β = 1.562387986, and rf ranged between 6.5% - 9.5% (changed from 2008-2010), expected return value is 0.047%.
Z* = (0.047% - 0.0129%) / 3.278% = 0.010482
Since Z*< 1.96 and Z* > -1.96, H0 accepted
Because both of expected return from two kinds of β accepted, then this formula is valid, and accepted.
 
Conclusion
In creating decision about investment, we could use CAPM as tool, in calculating the market risk premium and expected return. Although some expert thinks that there are other factors that affect stock price. In a small company, CAPM calculation sometimes failed, because actual returns are much bigger than expected return. CAPM is too simple to handle everything that’s going on in the stock market.
In Aneka Tambang Tbk, beta value are bigger than 1. It means that this company stock return categorized as aggressive. When there is 1% increase in market return, then the expected increment for stock return are bigger than 1%.

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