| 
  • If you are citizen of an European Union member nation, you may not use this service unless you are at least 16 years old.

  • You already know Dokkio is an AI-powered assistant to organize & manage your digital files & messages. Very soon, Dokkio will support Outlook as well as One Drive. Check it out today!

View
 

beta coefficient

Page history last edited by Brian D Butler 13 years ago

 

 

 

 

 

 

Beta

When Investing:  Beta is a measure of the return from a portfolio that comes right from the market.  It doesn't involve investor skills (alpha), and is the return that you should expect if you invest in an index fund such as an ETF exchange traded funds.

 

 

Table of Contents


 

 

Beta Coefficient

 

 

Beta measures risk.  It tells you how closely the expected returns are to the S&P index.  A beta of 1.0 means that 10% increase in the market should result in a 10% increase in the stock (or investment project).  If the beta is >1.0 , then its more risky than the S&P 500, and should have a higher return.  If the beta is less than 1.0, then the stock is less responsive to market movements than the average, and is therefore considered less risky, and should have a lower expected return.

 

For example, if every stock in the New York Stock Exchange was uncorrelated with every other stock, then every stock would have a Beta of zero, and it would be possible to create a portfolio that was nearly risk free, simply by diversifying it sufficiently so that the variations in the individual stocks' prices averaged out. This would be like owning a casino: essentially none of the business risk of owning a casino comes from the uncertain outcomes of the games of chance played by the customers, because those are uncorrelated, and average out over any significant period of time. In reality, investments tend to be correlated, more so within an industry, or when considering a single asset class (such as equities), as was demonstrated in the Wall Street crash of 1929. This correlated risk, measured by Beta, is what actually creates almost all of the risk in a diversified portfolio.

 

 

The formula for the Beta of an asset within a portfolio is

 

 

\beta_a=\frac {\mathrm{Cov}(r_a,r_p)}{\mathrm{Var}(r_p)}

 

 

 

 

 

The Beta coefficient, in terms of finance and investing, is a measure of a stock (or portfolio)’s volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis. The beta coefficient is a key parameter in the capital asset pricing model ( CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio.

Definition from wikipedia

 

 

Problems with using beta

 

Using historical estimates of beta to calculate hurdle rates is made more difficult if the company has multiple lines of business. It would then be the weighted average of the various betas of the different lines of business.

 

Another problem is that leverage affects beta. Adding debt to a firm will increase its equity beta even if teh riskiness of the firms assets remains unchanged. As debt increases, the cash flows to remaining shockholders becomes more risky. The historical beta of a firm, therefore, has to be adjusted unless the new project has exactly the same risk and same leverage as the firm.

 

 

 

 

 

 

List of Beta's by industry

 

 

 

Industry Name Number of Firms Average Beta Market D/E Ratio Tax Rate Unlevered Beta Cash/Firm Value Unlevered Beta corrected for cash
Advertising 36 0.99 22.25% 11.96% 0.83 6.85% 0.89
Aerospace/Defense 73 0.92 20.81% 21.77% 0.79 6.35% 0.84
Air Transport 56 1.38 42.16% 19.40% 1.03 11.95% 1.17
Apparel 64 0.93 13.39% 21.60% 0.84 5.46% 0.89
Auto & Truck 31 1.29 125.80% 18.90% 0.64 11.63% 0.72
Auto Parts 64 0.99 52.49% 18.93% 0.69 9.69% 0.77
Bank 550 0.59 54.59% 27.81% 0.43 10.20% 0.47
Bank (Canadian) 7 0.72 10.07% 24.41% 0.67 4.78% 0.70
Bank (Foreign) 4 1.78 NA 0.00% NA NA NA
Bank (Midwest) 37 0.79 61.47% 29.14% 0.55 8.86% 0.61
Beverage (Alcoholic) 27 0.66 23.56% 15.30% 0.55 1.67% 0.56
Beverage (Soft Drink) 21 0.71 13.63% 17.74% 0.63 3.75% 0.66
Biotechnology 105 1.56 4.39% 4.41% 1.50 6.65% 1.61
Building Materials 47 0.98 33.54% 23.55% 0.78 14.48% 0.91
Cable TV 23 1.76 38.89% 13.90% 1.31 2.42% 1.35
Canadian Energy 14 0.73 14.27% 30.19% 0.66 1.28% 0.67
Cement & Aggregates 13 1.02 26.35% 26.29% 0.85 2.61% 0.87
Chemical (Basic) 24 0.98 27.64% 13.31% 0.79 5.08% 0.83
Chemical (Diversified) 36 0.97 16.32% 25.87% 0.86 3.74% 0.90
Chemical (Specialty) 94 0.98 21.54% 19.08% 0.84 3.25% 0.87
Coal 16 1.75 15.96% 11.64% 1.53 4.11% 1.60
Computer Software/Svcs 425 1.84 3.56% 10.36% 1.79 10.49% 2.00
Computers/Peripherals 148 1.99 6.68% 7.84% 1.88 12.11% 2.14
Diversified Co. 134 0.87 22.60% 18.87% 0.74 5.95% 0.79
Drug 334 1.59 9.36% 6.09% 1.46 8.53% 1.60
E-Commerce 60 2.23 3.86% 9.38% 2.15 14.00% 2.50
Educational Services 37 1.09 2.65% 20.95% 1.06 8.99% 1.17
Electric Util. (Central) 24 0.94 69.87% 26.93% 0.62 1.66% 0.63
Electric Utility (East) 29 0.87 56.29% 28.01% 0.62 1.26% 0.63
Electric Utility (West) 16 0.97 58.80% 28.87% 0.68 3.26% 0.71
Electrical Equipment 94 1.52 72.60% 15.47% 0.94 7.73% 1.02
Electronics 186 1.49 14.54% 13.04% 1.33 14.11% 1.54
Entertainment 101 1.30 26.12% 16.69% 1.07 4.53% 1.12
Entertainment Tech 31 2.18 3.38% 10.21% 2.12 16.90% 2.55
Environmental 96 0.87 48.22% 9.45% 0.60 2.14% 0.62
Financial Svcs. (Div.) 269 0.89 132.40% 19.72% 0.43 6.92% 0.47
Food Processing 123 0.72 22.39% 19.60% 0.61 2.53% 0.63
Food Wholesalers 21 0.72 29.15% 23.66% 0.59 5.02% 0.62
Foreign Electronics 10 1.03 23.76% 41.66% 0.90 15.59% 1.07
Furn/Home Furnishings 38 0.87 30.22% 26.93% 0.71 4.45% 0.75
Grocery 19 1.04 39.11% 23.54% 0.80 5.43% 0.84
Healthcare Information 34 1.22 10.30% 10.07% 1.12 8.50% 1.22
Home Appliance 14 0.84 18.39% 14.69% 0.73 11.22% 0.82
Homebuilding 41 0.98 61.74% 23.77% 0.67 5.51% 0.71
Hotel/Gaming 84 0.77 33.19% 14.22% 0.60 2.99% 0.62
Household Products 31 0.79 18.46% 24.86% 0.69 2.74% 0.71
Human Resources 35 1.22 7.87% 25.27% 1.15 8.29% 1.26
Industrial Services 230 1.01 19.71% 16.91% 0.86 6.02% 0.92
Information Services 41 1.02 8.15% 18.42% 0.95 3.80% 0.99
Insurance (Life) 40 0.93 13.15% 23.66% 0.85 13.06% 0.98
Insurance (Prop/Cas.) 97 0.83 12.40% 18.73% 0.75 14.33% 0.88
Internet 329 2.30 2.28% 4.76% 2.25 8.55% 2.46
Investment Co. 20 0.75 103.83% 0.00% 0.37 5.64% 0.39
Investment Co.(Foreign) 15 1.21 4.09% 2.49% 1.16 2.53% 1.19
Machinery 139 1.01 31.26% 20.52% 0.81 4.62% 0.84
Manuf. Housing/RV 19 0.99 19.00% 19.77% 0.86 11.03% 0.96
Maritime 46 0.86 60.09% 5.91% 0.55 4.39% 0.58
Medical Services 186 0.94 17.47% 17.17% 0.82 11.80% 0.93
Medical Supplies 279 1.11 6.47% 13.16% 1.05 6.74% 1.12
Metal Fabricating 37 1.01 15.88% 24.89% 0.91 3.46% 0.94
Metals & Mining (Div.) 82 1.04 8.74% 7.81% 0.96 3.22% 0.99
Natural Gas (Distrib.) 30 0.73 60.93% 30.18% 0.51 2.60% 0.52
Natural Gas (Div.) 34 1.01 40.33% 22.04% 0.77 3.91% 0.80
Newspaper 18 0.76 30.08% 24.85% 0.62 1.53% 0.63
Office Equip/Supplies 26 1.02 24.34% 29.99% 0.87 6.01% 0.93
Oilfield Svcs/Equip. 110 1.05 11.72% 21.42% 0.96 4.33% 1.01
Packaging & Container 36 0.87 55.22% 25.40% 0.61 3.60% 0.64
Paper/Forest Products 42 0.84 56.50% 15.72% 0.57 5.38% 0.60
Petroleum (Integrated) 30 0.96 9.00% 29.47% 0.90 5.16% 0.95
Petroleum (Producing) 178 0.88 13.69% 14.79% 0.79 1.71% 0.80
Pharmacy Services 20 0.93 9.04% 27.16% 0.88 3.59% 0.91
Power 41 2.39 17.83% 6.84% 2.05 1.76% 2.08
Precious Metals 67 0.90 7.10% 6.54% 0.84 4.65% 0.88
Precision Instrument 104 1.71 8.97% 17.07% 1.59 13.52% 1.84
Publishing 50 0.89 32.54% 18.02% 0.70 3.76% 0.73
R.E.I.T. 143 0.77 63.99% 1.41% 0.47 4.65% 0.50
Railroad 20 0.96 29.86% 23.61% 0.78 1.98% 0.79
Recreation 84 1.12 20.04% 18.03% 0.96 4.94% 1.01
Restaurant 81 0.80 15.21% 19.13% 0.71 4.14% 0.74
Retail (Special Lines) 164 0.98 8.43% 23.42% 0.92 9.15% 1.02
Retail Automotive 15 1.04 34.98% 34.85% 0.84 4.60% 0.89
Retail Building Supply 9 0.95 5.82% 27.35% 0.91 1.26% 0.92
Retail Store 51 0.94 16.61% 21.10% 0.83 4.47% 0.87
Securities Brokerage 32 1.29 155.35% 21.27% 0.58 25.89% 0.78
Semiconductor 124 2.92 4.97% 10.47% 2.79 12.37% 3.19
Semiconductor Equip 14 2.95 7.53% 21.31% 2.78 18.08% 3.40
Shoe 24 1.08 3.64% 28.93% 1.05 8.36% 1.15
Steel (General) 30 1.16 14.62% 29.85% 1.05 7.35% 1.13
Steel (Integrated) 16 1.50 23.62% 18.09% 1.26 9.77% 1.39
Telecom. Equipment 136 2.35 5.28% 10.38% 2.24 14.60% 2.63
Telecom. Services 173 1.43 32.64% 12.90% 1.11 3.55% 1.15
Thrift 248 0.56 22.62% 25.14% 0.48 11.25% 0.54
Tire & Rubber 10 0.96 14.18% 5.94% 0.85 6.11% 0.90
Tobacco 11 0.79 17.06% 26.74% 0.70 4.02% 0.73
Toiletries/Cosmetics 21 0.83 18.06% 20.95% 0.72 4.94% 0.76
Trucking 38 0.98 40.58% 30.50% 0.77 5.40% 0.81
Utility (Foreign) 6 1.00 62.76% 11.52% 0.64 3.70% 0.67
Water Utility 16 0.73 48.86% 29.78% 0.54 0.70% 0.54
Wireless Networking 73 2.41 17.70% 9.93% 2.08 6.50% 2.22
Other 1 1.06 2.45% 0.00% 1.03 1.44% 1.05
Market 7661 1.14 32.11% 16.40% 0.90 7.53% 0.98

 

 

 

How to value Stocks:

 

One have to consider a whole slew of factors before making a stock purchase. For the beginning investor, some basic things to look for are:

 

 

 

 

 

Comments (0)

You don't have permission to comment on this page.