BETA

BETA
• A “coefficient measuring a stock’s
relative volatility”

• Beta measures a stock’s sensitivity to

overall market movements
• 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

 Company Beta
AMGN 0.82
BRK.B 0.73
C 1.37
XOM 0.10
MSFT 1.80
MWD 2.19
NOK 2.05
PXLW 1.93
TXN 1.70
VIA.B 1.39
Source: taken from yahoo.finance.com, except PXLW from
 Beta and Risk
• Beta is a measure of volatility

• Volatility is associated with risk

 Risk-Reward Curve
Risk

Expected Return
• If beta is a measure of risk, then investors who
hold stocks with higher betas should expect a
higher return for taking on that
 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
 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)
 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
 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**
 How to Calculate Beta
• Easily calculated using Excel and Yahoo!
Finance
• Use COVAR and VARP worksheet functions
Thank You