Instruction: Calculating the Beta Value of an Individual Stock Using CAPM and

Fama/French 3-Factor Model (Example: Tata Motors (TAMO)

Introduction:
This instruction provides a detailed guide for calculating the beta value of an individual stock,
specifically using Tata Motors as an example. The process is based on both the Capital Asset
Pricing Model (CAPM) and the Fama/French 3-Factor Model. The steps outlined here include
selecting a time frame, gathering data on stock prices and Fama/French factors, calculating
returns, running regression analysis, and conducting a final analysis.

Step-by-Step Instructions:

1. Select a Time Frame

 Choose the period over which you will calculate the beta value. Common choices
include two to five years with daily returns.
 This timeframe provides recent data, capturing any recent volatility or trends in the
market that may affect Tata Motors’ beta calculation.

2. Gather Data of Stock Price

To calculate the beta value for TATA MOTORS (TAMO), you'll need historical price data for
Coca-Cola (KO) over the selected timeframe. Here's how to obtain this data:

Google Search:

 Start by performing a Google search for "Tata Motors (TAMO) historical stock
price." This will show various sources for historical data.

Select a Data Source:

 For this example, we’ll use Investing.com as the data source. Visit the link:

 https://in.investing.com/equities/tata-motors-ltd
 .
 https://uk.investing.com/equities/tata-motors-ltd-historical-data


Set the Time Frame:

 On the Investing.com page, set the Time Frame to "Daily" to ensure daily prices.

 In the Period section, set the date range ( for example, not in this excel file), say
September 30, 2022, to September 30, 2024. Click the "APPLY" button to filter the
data based on the selected timeframe.

Sort by Date:
  Click on the "Date" column header to arrange the data chronologically, starting from
the initial date (September 30, 2022) to the end date (September 30, 2024).

Download the Data:

 Lastly, click the "Download" button to save the data, typically in CSV format, for
analysis.

4. Gather Data of Benchmark Index Data

To obtain benchmark data for the Fama/French 3 Factors, follow these steps:

Google Search:

 Start by performing a Google search for "Kenneth R. French data set."

Access the Data Library:

 Click on the Kenneth R. French homepage link from the search results
 On the homepage, navigate to the Data Library section.
(https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html)

Locate Fama/French 3 Factors (Daily):

 Scroll down through the Data Library until you find Fama/French 3 Factors [Daily].

(Note: This dataset provides daily factor returns based on all NYSE, AMEX, and
NASDAQ firms, making it an effective benchmark index for U.S.-listed companies.)
 Download the Data:

 Click on the "CSV" link next to Fama/French 3 Factors [Daily] to download the
dataset.
 Now that we have the necessary data for the CAPM and Fama/French 3-Factor
model. Mkt-RF: Excess market return. SMB: Size factor, representing the return
spread between small-cap and large-cap stocks. HML: Value factor, representing the
return spread between high book-to-market and low book-to-market stocks. RF:
Risk-free rate.

5. Organize the Data and Calculate Daily Returns

To merge the stock price data with the benchmark index data and calculate the daily returns,
follow these steps in a spreadsheet (e.g., Excel):

 Ensure both the stock price data (e.g.,Tata Motorsa) and the benchmark index data
are in the same worksheet ( done in the work sheet attached)

 In the row for the second trading day (October 3, 2022), enter the formula to
calculate the daily return (Ri) based on the prices.
 For example, assuming: Column B has the stock prices, Cell B3 is the stock price on
October 3, 2022, and Cell B2 is the stock price on September 30, 2022, Enter this
formula in the cell for October 3, 2022's return:

=(B3 - B2) / B2

 Calculate RT-Rf

=O3-M3

 Copy and paste it down the column to apply it to all subsequent dates.

5. Regression analysis

Install the Data Analysis Toolpak (if not installed):

 Go to File > Options.

Set Up Regression for CAPM Model:

 Go to Data > Data Analysis and select Regression, then click OK.
  Input Y Range: Select the range for the stock’s excess return (Ri – RF).
 Input X Range: For the CAPM model, select the Mkt-RF column as the independent
variable. Set Up Regression for Fama/French 3-Factor Model:
 Make sure that the number of cells conform to each oter.

 Go to Data > Data Analysis and select Regression, then click OK.
 Input Y Range: As with CAPM, set this to the stock’s excess return range .
 Input X Range: For the 3-Factor model, select the ranges for Mkt-RF, SMB, and HML
factors as independent variables.

5. Interpret the Results

The regression analysis results have provided coefficients for each factor. Here’s how to
interpret these coefficients for both the CAPM and Fama/French 3-Factor models, using
Coca-Cola as the example:

For the CAPM Model:

Mkt- RF Coefficient (Beta): The beta for TAMO is 0.000888

 Mkt-RF Coefficient (X Variable 1): Since this beta is less than 1, it indicates that Coca-
Cola is less volatile than the market. In other words, Tata Motors’s stock tends to
move less dramatically than the overall market.

For the Fama/French 3-Factor Model:

 Mkt-RF Coefficient (X Variable 1): This represents Tamo’s sensitivity to the overall
market. A value of 0. 0.000162 here would again suggest low sensitivity to market
movements, consistent with the CAPM model.
 HML (Value Factor) Coefficient (X Variable 3): Check the value for HML. A positive
HML coefficient 0. 0.00041744 implies Tata Motors has value stock characteristics
(high book-to-market ratio).
Using these instructions, you can calculate and interpret TAMO’’ beta values through both
the CAPM and Fama/French 3-Factor models, providing a comprehensive understanding of
the stock’s risk relative to market, size, and value factors.