1 / 18

Beta

Beta. or…. “What Is Beta and How Is It Calculated?”. Beta. A “coefficient measuring a stock’s relative volatility” Beta measures a stock’s sensitivity to overall market movements. Source:UBS Warburg Dictionary of Finance and Investment Terms.

rasul
Download Presentation

Beta

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Beta or…. “What Is Beta and How Is It Calculated?”

  2. Beta • A “coefficient measuring a stock’s relative volatility” • Beta measures a stock’s sensitivity to overall market movements Source:UBS Warburg Dictionary of Finance and Investment Terms

  3. In practice, Beta is measured by comparing changes in a stock price to changes in the value of the S&P 500 index over a given time period • The S&P 500 index has a beta of 1

  4. A Generic Example • Stock XYZ has a beta of 2 • The S&P 500 index increases in value by 10% • The price of XYZ is expected to increase 20% over the same time period

  5. Beta can be Negative • Stock XYZ has a beta of –2 • The S&P 500 index INCREASES in value by 10% • The price of XYZ is expected to DECREASE 20% over the same time period

  6. If the beta of XYZ is 1.5 … • And the S&P increases in value by 10% • The price of XYZ is expected to increase 15%

  7. A beta of 0 indicates that changes in the market index cannot be used to predict changes in the price of the stock • The company’s stock price has no correlation to movments in the market index

  8. Source: taken from yahoo.finance.com, except PXLW from bloomberg.com

  9. Beta and Risk • Beta is a measure of volatility • Volatility is associated with risk

  10. Risk-Reward Curve Risk Expected Return

  11. If beta is a measure of risk, then investors who hold stocks with higher betas should expect a higher return for taking on that risk • What does this remind you of?

  12. Beta and CAPM The capital asset pricing model: E(R) = Rf + B(Rm-Rf) where: E(R) = Expected return Rf = risk free rate of return B = beta Rm = market return

  13. WACC Weighted average cost of capital: WACC = (D/V)*Rd*(1-T) + (E/V)*Re where: D = market value of firm’s debt Rd = return on debt securities T = tax rate E = market value of firm’s equity securities Re = return on equity securities (from CAPM) V = total value of firm’s securities (D + V)

  14. WACC and Beta • WACC increases as the beta and the rate of return on the equity securities increases (all else constant) • WACC is used as the discount rate in DCF models • Therefore, increasing WACC reduces the firms valuation to reflect the increase in risk

  15. How to Calculate Beta Beta = Covariance(stock price, market index) Variance(market index) **When calculating, you must compare the percent change in the stock price to the percent change in the market index**

  16. How to Calculate Beta • Easily calculated using Excel and Yahoo! Finance • Use COVAR and VARP worksheet functions • An example: Calculate the beta of Citigroup stock over the 5-yr time period from Jan. 1, 1997 – Dec. 31, 2001

  17. S&P 500 Adjusted Daily Closing Values: January 1, 1997 - December 31, 1997 Citigroup Adjusted Daily Closing Prices: January 1, 1997 - December 31, 1997

More Related