Thread by @scorpiomanojFRM

#Learning
How to arrive at the equity market exposure (equity trading / investments)?
1) Expected Return :
Exp return = Risk Free return + Beta (Equity risk Premium)
Risk free return = 6% (10 year GSec yield)
Beta = Measure of the risk of you exposure vis a vis the broader mkt
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Since your exposure is in equity, beta can be kept as 1 if your strategy limits only to large caps; however if your strategy includes also mid / small caps / fno stocks, the actual beta will increase.....

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Statistically, beta = covariance (broader index daily return, average of large/mid/smallcap/fno daily return) / Variance or broader market return. (Can be easily computed in excel if you have the underlying data).
I am assuming a beta of 2 on an average for this tweet....

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Equity Risk premium is the excess return over risk free rate expected to compensate for the exposure to equity. It is published on a daily basis country wise by stern new york university.8.46% for India
Combining all the inputs,
Expected return = 6% + 2 X (8.46%) = 23%
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Now the minimum return required is 23% p.a.

2) Decide your absolute annual income requirement :

Next stage is to decide how much income you require annually. Let us take Rs.12 lacs.

3) Calculate the minimum capital required :
Minimum capital required = 12 lacs / 23%
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Minimum capital required = 53 lacs.
This means you require a minimum capital of Rs 53 lacs to operate in an environment which is twice the risk of broader market (beta = 2) which translates a return of 23% per annum and in terms of absolute amount Rs 12 lacs.
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As the input parameter changes, the Min capital requirement changes. You can play around with the equation in excel to have an idea.
Academically, it is called Capital Asset Pricing Model (CAPM).