Market risk and expected minimum return of the chemical substance and product manufacturing sector: period 2011 – 2020

Abstract

Risk and profitability are two interdependent aspects in business activity: a certain level of risk must be assumed to achieve greater profitability. The Capital Asset Pricing Model (CAPM) is one of the most widely used models in practice to determine the required return on an investment in a financial asset based on the risk assumed. There are various models and statistical tools that seek to predict financial risk. In the present research work, the market risk and expected minimum return in the chemical substance and product manufacturing sector (CIIU C20) were determined through accounting information. The data was obtained from the Superintendency, Securities and Insurance and corresponded to the period 2011-2020, and the results were analyzed in periods of 5 years, in order to know the variations that occur between the different periods. For the analysis of this sector 3.756 observations (376 companies per year on average) were considered in the period. In addition, a total of 513.895 observations were considered as a market. In the CAPM, the passive rate of the Central Bank of Ecuador was considered as the risk-free rate. In addition, for market performance, an adjusted ROE was calculated for all companies in the corporate sector in Ecuador. The unlevered and levered Beta coefficient obtained in the 5 periods analyzed is greater than 1, that is, it is considered a risky sector. The minimum expected yield of the sector fell from 12,15% in the 2011-2015 period to 4,98% in the 2016-2020 period. The results indicate that the results indicate that chemical substance and product manufacturing sector has a better performance than the market as a whole, since it has a higher performance than required. Considering the high level of uncertainty that currently exists, determining market risk is an important tool to support entrepreneurs and other stakeholders in making decisions.