INNOVA Research Journal, ISSN 2477-9024  
Septiembre-Diciembre 2022). Vol. 7, No.3.1 pp. 26-37  
(
DOI: https://doi.org/10.33890/innova.v7.n3.1.2022.2125  
URL: http://revistas.uide.edu.ec/index.php/innova/index  
Correo: innova@uide.edu.ec  
Market risk and expected minimum return of the chemical substance and  
product manufacturing sector: Period 2011 – 2020  
Riesgo de mercado y rentabilidad mínima esperada del sector de fabricación  
de sustancias y productos químicos: Período 2011 – 2020  
Luis Tonon-Ordóñez  
Universidad del Azuay, Cuenca, Ecuador  
ltonon@uazuay.edu.ec  
https://orcid.org/0000-0003-2360-9911  
Estefanía Cevallos-Rodríguez  
Universidad del Azuay, Cuenca, Ecuador  
ecevallosr@uazuay.edu.ec  
https://orcid.org/0000-0001-8238-2337  
Luis Pinos-Luzuriaga  
Universidad del Azuay, Cuenca, Ecuador  
lpinos@uauzay.edu.ec  
https://orcid.org/0000-0002-3894-8652  
Iván Orellana-Osorio  
Universidad del Azuay, Cuenca, Ecuador  
ivano@uazuay.edu.ec  
https://orcid.org/0000-0001-6279-2734  
Recepción: 06/07/2022 | Aceptación: 14/10/2022 | Publicación: 31/10/2022  
Cómo citar (APA, séptima edición):  
Tonon-Ordóñez, L., Cevallos-Rodríguez, E., Pinos-Luzuriaga, L., y Orellana-Osorio, I. (2022).  
Market risk and expected mínimum return of the chemical substance and product manufacturing  
sector: Period 2011 - 2020. INNOVA Research Journal, 7(3.1), 26-37.  
https://doi.org/10.33890/innova.v7.n3.1.2022.2125  
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26  
Market risk and expected mínimum return of the chemical substance and product manufacturing sector: Period  
011 - 2020  
2
Resumen  
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  
1
2,15% 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.  
Palabras claves: CAPM; Beta; market risk; expected return; chemical substances and products.  
Abstract  
Riesgo y rentabilidad son dos aspectos interdependientes en la actividad empresarial: se debe  
asumir un cierto nivel de riesgo para lograr una mayor rentabilidad. El modelo de valoración de  
activos de capital (CAPM) es uno de los modelos más utilizados en la práctica para determinar la  
rentabilidad exigida en una inversión en un activo financiero en función del riesgo asumido.  
Existen diversos modelos y herramientas estadísticas que buscan predecir el riesgo financiero. En  
el presente trabajo de investigación se determinó, a través de información contable, el riesgo de  
mercado y rendimiento mínimo esperado en el sector de fabricación de substancias y productos  
químicos (CIIU C20). La data fue obtenida de la Superintendencia, Valores y Seguros y  
correspondió al periodo 2011-2020, y se analizaron los resultados en periodos de 5 años, para de  
esta manera, conocer las variaciones que se presentan entre los distintos periodos. Para el análisis  
de este sector se consideraron 3.756 observaciones (376 empresas por año en promedio) en el  
periodo. Además, se consideraron como mercado un total de 513.895 observaciones. En el modelo  
CAPM se consideró como tasa libre de riesgo la tasa pasiva del Banco Central del Ecuador y como  
rendimiento de mercado un ROE ajustado del total de empresas del sector societario del Ecuador.  
El coeficiente Beta desapalancado y apalancado obtenido en los 5 periodos analizados es superior  
a 1, es decir, que se considera un sector riesgoso. El rendimiento mínimo esperado del sector se  
reduce de 12,15% en el periodo 2011-2015 a 4,98% en el periodo 2016-2020. Los resultados  
indican que el sector de fabricación de substancias y productos químicos tiene un mejor desempeño  
que el mercado en conjunto, ya que posee un rendimiento mayor al exigido. Si se considera el alto  
nivel de incertidumbre existente actualmente, determinar el riesgo de mercado es una herramienta  
importante para apoyar en la toma de decisiones a los empresarios y otros grupos de interés.  
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27  
Luis Tonon-Ordóñez, Estefanía Cevallos-Rodríguez, Luis Pinos-Luzuriaga y Iván Orellana-Osorio  
ISSN 2477-9024. Innova Research Journal (Septiembre-Diciembre, 2022). Vol. N7, No. 3.1, pp. 26-37  
Keywords: CAPM; Beta; riesgo de mercado; rendimiento esperado; substancias y productos  
químicos.  
Introduction  
In finance, one of the concerns that investors have is the level of investment risk, since the  
loss or profit depends on it (Brenes, 2019) . Risk and profitability are two interdependent aspects  
in business activity: a certain level of risk must be assumed to achieve greater profitability  
(Solomon & Muntean, 2012) .The interdependence between financial markets, especially during  
turbulent times such as the COVID-19 crisis, has led to an unprecedented proliferation of studies  
on market dynamics (Al-Nassar & Makram, 2022) . For Wong and Chirinos (2016) , market risk  
is called the probability of variations in the price and position of some asset of a company, this  
refers to the risk of possible loss of value of an asset associated with fluctuations and variations in  
the market. Considering the level of uncertainty in the world, investment decisions are based on  
expectations about its future value. In this context, risk models become an important tool for  
investors and other stakeholders in decision making.  
There are various models and statistical tools that seek to predict financial risk. In this  
research, it is proposed to calculate the market risk through the accounting Beta coefficient and  
minimum expected return through the Capital Asset Pricing Model (CAPM) applied to the  
manufacturing sector of chemical substances and products (ISIC-C20). On the basis of the above,  
the research question arises: What is the market risk and minimum expected return of the chemical  
substance and product manufacturing sector?  
The study is divided into sections. In the second section, the literature review and  
theoretical framework are exposed, where concepts about market risk are explained, as well as the  
main investigations related to the subject. The third section explains the applied methodology, as  
well as a brief description of the data used. The fourth section presents the results; and finally, the  
main conclusions and discussions of the study are exposed.  
Literature review  
Market risk, according to Mejia et al. (2005) , is associated with economic changes in a  
country due to internal or external factors; this risk is not diversifiable. The CAPM model links  
the market risk that all companies have and the expected return of a certain security or portfolio  
(Vitoria et al., 2020) , and is one of the most widely used financial models to determine the market  
price and the appropriate risk measure for an individual asset or portfolio (Breeden et al., 1989;  
Pereiro, 2010; Cartes, 2012; Támara et al., 2017; Chang and Galindo, 2018; Ruíz et al, 2021) .  
This model was developed by Sharpe (1964) , Lintner (1965) , and Mossin (1966) , and its  
objective was to estimate the profitability of financial assets or portfolios based on their risk  
through the Beta β coefficient. This indicator represents the risk of an asset or portfolio in relation  
to the market.  
The CAPM is simple, intuitive and based on a solid economic theory (Vendrame et al.,  
2
018) , from which new proposals have emerged. Apergis and Rehman (2018) investigated the  
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Market risk and expected mínimum return of the chemical substance and product manufacturing sector: Period  
011 - 2020  
2
role of investor sentiment in asset pricing and illustrated that the CAPM captures rational investor  
behavior. Cenesizoglu and Reeves (2018) proposed a conditional version of the capital asset  
pricing model, which more effectively explains the cross section of expected returns. With respect  
to studies carried out in Latin America, Botello and Guerrero (2021) assessed the risk of investors  
based on accounting information, before and after the International Financial Reporting Standards  
(
IFRS), in credit institutions in Colombia. Santos et al. (2019) proposed a conditional Asset Pricing  
Model for the evaluation of Brazilian funds. Sandoval et al. (2015) carried out an investigation on  
the degree of integration of the stock markets of Chile, Colombia and Peru before and after the  
implementation of the Integrated Latin American Market (MILA); the authors used as a basis a  
conditional version of the international CAPM. Wong and Chirinos (2016) carried out an  
investigation on the relevance of the NPV-CAPM to assess family businesses with a sample of  
1
47 businesses in Peru in order to guarantee the application of the CAPM and its validity for the  
valuation of shares in the Latin American Integrated Market . Firacative (2015) comparatively  
studied the stock markets of Colombia, Chile and Peru applying the model and obtaining the  
parameters of each of the assets of a sample of a base period. Poquechoque (2020) makes an  
estimation of the Beta coefficient calculation for companies listed on the Bolivian Stock Exchange,  
who indicates that it is a systematic risk indicator used in investments worldwide, and  
unfortunately it has not been calculated and therefore not used in Bolivia.  
In Ecuador, an investigation was carried out with the purpose of demonstrating that the  
CAPM model with some adjustments can be used in economies in developed countries, that is, in  
countries that have underdeveloped stock markets (Villagómez, 2014) . Another research that can  
be highlighted in Ecuador was developed by Valverde and Caicedo (2020) , who calculated the  
Betas by applying the CAPM to recognize the profitable influence of 35 companies linked to the  
Ecuadorian stock market during the period 2014-2019. Pines et al. (2021) carried out an  
investigation to calculate the minimum expected return for the manufacturing sector of other non-  
metallic mineral products in Ecuador through accounting financial information.  
Methodology  
The research is quantitative with an explanatory scope. For the analysis of the chemical  
substance and product manufacturing sector 3.756 observations (376 companies per year on  
average) were considered in the 2011-2020 period. In addition, a total of 513.895 observations  
were considered as a market. The provinces of Guayas, Pichincha and Azuay had the largest  
number of observations (41,85%, 40,42% and 5,17% respectively). The financial information was  
obtained from the Superintendence of Securities and Insurance Companies (2021) and companies  
were eliminated according to the authors' criteria: companies without financial information or that  
did not present activity . Table  
Table 1shows the subsectors that make up the sector under analysis.  
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Luis Tonon-Ordóñez, Estefanía Cevallos-Rodríguez, Luis Pinos-Luzuriaga y Iván Orellana-Osorio  
ISSN 2477-9024. Innova Research Journal (Septiembre-Diciembre, 2022). Vol. N7, No. 3.1, pp. 26-37  
Table 1  
Classification of the chemical substance and product manufacturing sector  
ISIC  
Description  
C201  
Manufacture of basic chemicals, fertilizers and nitrogen compounds, and plastics and synthetic rubber in  
primary forms  
C2011 Basic chemical manufacturing  
C2012 Manufacture of fertilizers and nitrogen compounds.  
C2013 Manufacture of plastics and synthetic rubbers in primary forms  
C202  
Manufacture of other chemicals  
C2021 Manufacture of pesticides and other chemical products for agricultural use  
C2022 Manufacture of paints, varnishes and similar coating products, printing inks and fillers  
Manufacture of soaps and detergents, cleaning and polishing preparations, perfumes and toilet  
C2023 preparations  
C2029 Manufacture of another chemical products NCP  
C203  
Manufacture of artificial fibers  
C2030 Manufacture of artificial fibers  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Calculation methodology  
The market risk was determined by means of the Beta coefficient, in addition, the minimum  
expected return was calculated by means of the CAPM, which basically indicates that the expected  
return of an asset is equal to the risk-free rate plus a premium for the risk. The risk premium is the  
difference between the market return and the risk-free rate, multiplied by the level of risk  
represented by the Beta coefficient. The model is formulated as follows:  
E(R ) = R + β ∗ (E(R ) − R )  
( 1)  
i
f
i
m
f
Where:  
•
•
•
•
E (푅 ) = Minimum expected return on security i.  
푖
푅 = Yield of the risk-free security.  
푓
E (푅 ) = Expected return on the market portfolio.  
푚
훽푖= Measure of systematic risk.  
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Market risk and expected mínimum return of the chemical substance and product manufacturing sector: Period  
011 - 2020  
2
The calculations were made in periods of 5 years in order to analyze existing variations in  
the levels of risk and return. In addition, unlevered Betas were used, since interest and taxes were  
not considered to calculate the yield. In the calculation of the Beta coefficient an adjusted ROE  
was used, as shown in formula 2:  
Utilidad operativa (sin 푖푚푝푢푒푠푡표푠)  
푅푂퐸푎푑푗푢푠푡푒푑  
=
(2)  
Patrimonio inicial  
In the results of the Beta coefficient, it should be considered that:  
•
•
•
•
Negative Beta: A Beta coefficient less than 0 indicates an inverse relationship to the market.  
Beta equal to zero: the asset has no risk.  
Beta equal to 1: represents the volatility of a representative market index.  
Beta greater than 1: reflects a higher volatility than that of the market.  
The leveraged Beta coefficient was also calculated. According to Martínez et al. (2014) ,  
the leveraged Beta coefficient of the stock ( 훽푙푒푣푒푟푒푑) can be calculated as a function of the Beta  
without leverage ( 훽푢푛푙푒푣푒푟푒푑) and the debt ratio (D/E).  
퐷
훽푙푒푣푒푟푒푑 = 훽푢푛푙푒푣푒푟푒푑 ∗ [ 1 + ((1 − 푇 ) ∗ )  
( 2)  
ꢀ
Results  
Market performance (푅푚)  
To determine market performance, the adjusted ROE of all companies in the corporate  
sector of Ecuador was used. Figure 1 shows a decreasing trend; in the period 2011 - 2015 the  
highest return is given (11,98% and 22,98% respectively), while in the last period the lowest  
(5,10% and 13,14% respectively). As can be seen, the performance of the C20 sector is higher than  
that of the market as a whole.  
Figure 1  
Market performance ( 푅 ) and sector C20  
푚
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Luis Tonon-Ordóñez, Estefanía Cevallos-Rodríguez, Luis Pinos-Luzuriaga y Iván Orellana-Osorio  
ISSN 2477-9024. Innova Research Journal (Septiembre-Diciembre, 2022). Vol. N7, No. 3.1, pp. 26-37  
2
2,98%  
2
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
016-2020  
0
1
1,98%  
1
9,23%  
8
,93%  
1
7,13%  
5,72%  
4,48%  
7
,42%  
,21%  
,73%  
1
6
1
5
1
3,14%  
5
,10%  
,00%  
5,00%  
10,00%  
15,00%  
20,00%  
25,00%  
Performance  
C20 performance  
Market performance  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Free rate (Rf)  
The Central Bank of Ecuador (2021) was considered as the risk-free rate . Figure 2 shows the  
values:  
Figure 2  
Risk-free rate ( Rf)  
Average 2011-2015  
Average 2012-2016  
Average 2013-2017  
Average 2014-2018  
Average 2015-2019  
Average 2016-2020  
4,77%  
5,01%  
5,08%  
5,20%  
5,40%  
5,57%  
5,60% 5,80%  
4
,20%  
4,40%  
4,60%  
4,80%  
5,00%  
Rate (%)  
5,20%  
5,40%  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Beta coefficient (β)  
The Beta coefficient of the C20 sector is greater than 1 in the 6 periods analysed, which  
means that companies in the chemical substance and product manufacturing sector are riskier than  
the market as a whole. If the last period, 2016-2020, is considered, for each percentage point that  
the performance of companies in Ecuador varies, the performance of companies in the C20 sector  
will vary 1,265%.  
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Market risk and expected mínimum return of the chemical substance and product manufacturing sector: Period  
011 - 2020  
2
Figure 3  
Beta coefficient of sector C20  
2
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
016-2020  
1,023  
1,225  
1,401  
1,480  
1,302  
1,265  
0
,000  
0,200  
0,400  
0,600  
0,800  
Beta  
1,000  
1,200  
1,400  
1,600  
Source: Superintendency of Companies, Securities and Insurance (2021)  
The minimum expected return of the C20 sector shows a decreasing trend, a value mainly  
influenced by the risk premium, which is lower, since the market return decreases over time.  
Figure 4  
Minimum expected return of the C20 sector  
2
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
016-2020  
0
12,15%  
9,81%  
8,36%  
6,69%  
5,84%  
4,98%  
,00%  
2,00%  
4,00%  
6,00%  
8,00%  
10,00%  
12,00%  
14,00%  
Minimum expected return  
Source: Superintendency of Companies, Securities and Insurance (2021)  
By applying formula 3, the leveraged Beta coefficient was obtained, and by applying  
formula 1, the minimum expected return was obtained: (See Table 2and Table 3)  
Table 2  
Summary of market risk calculations  
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Luis Tonon-Ordóñez, Estefanía Cevallos-Rodríguez, Luis Pinos-Luzuriaga y Iván Orellana-Osorio  
ISSN 2477-9024. Innova Research Journal (Septiembre-Diciembre, 2022). Vol. N7, No. 3.1, pp. 26-37  
Period  
Debt share  
32.50%  
32.97%  
33.61%  
33.79%  
34.42%  
34.48%  
Equity participation  
67.50%  
Tax rate  
35.04%  
38.71%  
41.17%  
43.79%  
46.66%  
46.65%  
2
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
016-2020  
67.03%  
66.39%  
66.21%  
65.58%  
65.52%  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Table 3  
Summary of market risk calculations  
Period  
Levered Beta  
1,343  
CAPM  
14.46%  
11.26%  
9.33%  
7.12%  
5.96%  
4.81%  
2
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
016-2020  
1,595  
1,818  
1,905  
1,666  
1,620  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Table through the CAPM.  
Table 4presents a summary of the market risk calculations, in addition to the minimum  
expected return obtained through the CAPM.  
Table 4  
Summary of C20 Sector Market Risk Calculations  
Period  
Unlevered Beta  
CAPM 1  
Levered Beta  
CAPM 2  
2
2
2
2
2
011-2015  
012-2016  
013-2017  
014-2018  
015-2019  
1,023  
1,225  
1,401  
1,480  
1,302  
12,15%  
9,81%  
8,36%  
6,69%  
5,84%  
1,343  
1,595  
1,818  
1,905  
1,666  
14,46%  
11,26%  
9,33%  
7,12%  
5,96%  
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Market risk and expected mínimum return of the chemical substance and product manufacturing sector: Period  
011 - 2020  
2
2
016-2020  
1,265  
4,98%  
1,620  
4,81%  
Source: Superintendency of Companies, Securities and Insurance (2021)  
Conclusions and discussion  
When an agent accumulates monetary surpluses or wealth there are three alternatives: keep  
these surpluses with the certainty that they are under his control, but an opportunity cost would be  
incurred; take these resources to a deposit in the financial system with which an interest or yield  
would be received; and invest those resources in an asset in the stock market and obtain a return  
that can be fixed or variable (Alvares et al., 2004 ) . This last alternative, however, implies a certain  
level of risk, which must be managed in order to reduce it. Why it takes more risk? The answer  
lies in the fact that the investor expects a higher return when it increases and a lower return when  
it decreases. In this context, Poquechoque (2020) asserts that without a systematic risk indicator  
investments in general become riskier.  
In this investigation, in order to determine the market risk and the expected minimum return  
of the chemical substance and product manufacturing sector the CAPM was used, which is widely  
accepted and considered of great importance in the financial area (Ramírez & Serna, 2012; Támara  
et al. ., 2017; Botello & Guerrero, 2021; Grant et al., 2021) ; furthermore, the model forms the  
theoretical basis underlying the most common approach to estimating the level of the cost of capital  
(Binz, 2020) .  
In developing countries, risk assessment is a complicated issue because the financial  
markets are smaller and have incipient development, in addition , it must be considered that these  
economies are volatile and, therefore, productive projects will be riskier (Botello & Guerrero,  
2
021) . Unlike developed markets, little information is available in emerging markets, and they  
are also subject to frequent regime changes with reversals in fiscal, monetary, and trade policies  
Chang & Galindo, 2018) . At present, the little development of the Ecuadorian stock market makes  
(
the operational functions inefficient, due to the fact that stock negotiations are not listed within the  
same Stock Exchange (Valverde & Caicedo, 2020) . Considering this scenario, the calculation of  
an accounting Beta is proposed in this research based on financial information obtained from the  
Superintendency of Companies, Securities and Insurance (2021).  
The Beta coefficient corresponds to the portion of the asset's risk that is correlated with the  
general market risk. In this case, the correlation that exists between the manufacturing sector of  
chemical substances and products and the market, represented by the total number of corporate  
companies in Ecuador, is studied. Obviously, when intervening in the market or the economy as a  
whole, this portion of risk cannot be avoided through diversification. With respect to the use of  
accounting Betas, deficiencies must be considered. Tamara et al. (2017) assert that this approach  
has three problems: earnings in companies tend to be smoothed with respect to the underlying  
value of the company, which produces a biased Beta coefficient, companies have non-operational  
factors that can influence earnings from the accounting point of view, and the consolidation period  
of accounting profits is carried out quarterly and/or annually, which implies regressions with few  
observations.  
Esta obra se comparte bajo la licencia Creative Common Atribución-No Comercial 4.0 International (CC BY-NC 4.0)  
Revista de la Universidad Internacional del Ecuador. URL: https://www.uide.edu.ec/  
35  
Luis Tonon-Ordóñez, Estefanía Cevallos-Rodríguez, Luis Pinos-Luzuriaga y Iván Orellana-Osorio  
ISSN 2477-9024. Innova Research Journal (Septiembre-Diciembre, 2022). Vol. N7, No. 3.1, pp. 26-37  
Regarding the results obtained, the Beta coefficient of the C20 sector is greater than 1 in  
the 6 periods analyzed, only the period 2011-2015 presents a Beta close to 1 (1.023). These values  
indicate that companies in the chemical substance and product manufacturing sector are riskier  
than the market as a whole. When comparing the yields of each of the periods analyzed and the  
minimum expected yield obtained through the CAPM, the sector has a better performance since it  
has a higher yield than required, that is, value is created.  
The results obtained will serve as a reference and support for business decision-making, as  
well as to know the level of demand of projects that are in the analyzed sectors. Among the  
implications and limitations of the research, it should be considered that the financial balances  
have an annual periodicity, which limits the number of variables that intervene in the study. In  
addition, the CAPM does not consider the special characteristics of micro and family businesses,  
as mentioned by Wong and Chirinos (2016) :non-monetary objectives, long investment periods,  
lack of diversification, among other factors, that distinguish this group of companies.  
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