Beta (finance)
The beta factor () is in the on the Capital Asset Pricing Model (CAPM ) building financial theories the code for the acquired with an investing or financing measure systematic risk (also called market risk) dar.
Description
Simply put, the beta factor is a measure that indicates how strongly fluctuates, the stock relative to the market. With a value of 1.0, the stock fluctuates as much as the average. If the value is less than 1, then this indicates a lower volatility. At a value of about 1.0, the stock fluctuates more than the average. A negative beta means that the return of the asset is directly opposed to the overall market.
The beta of a security against an efficient market portfolio is defined as
Or
That is, as the ratio of the statistical covariance of the expected returns of the securities with the expected returns of the market portfolio to the variance of the market portfolio, or equivalently as the product of the correlation coefficient of the security to the market portfolio with the ratio of standard deviation of the security to the standard deviation of the market portfolio.
The beta of a market portfolio is thus by definition 1
That says which undergoes change the expected return of an individual security or securities portfolio with a change in the return on the market portfolio by one percentage point. It then points to a linear relationship between the expected return on a risky investment and the expected return on the market portfolio.
The beta factor can distinguish three groups of securities form:
Application in the practice
In the complex practice results in the use of the beta factor for the risk weighting of assets and thus has significant impact on the level of individual Reviews and the construction of particular market phase driven investment strategies.
Decisive for the inclusion of a security in the portfolio is its contribution to the risk of the overall portfolio. Is the beta and standard deviation of the security ( WP) and the portfolio ( PF) is known, can thus calculate the correlation.
This is needed for the calculation of the variance of the expanded portfolio (EP).
Experimental evaluation of the betas
It will look at the historical prices of the securities at several points in time, then the calculation of the returns and standard deviations of returns from it. The determination of the beta is then analytically or by means of OLS regression:
Adaptation of the beta factor of the capital structure
In evaluation practice, there is often the problem is that the simultaneous use of various discounted cash flow ( DCF) method based on the " standard textbook" formulas ( Modigliani / Miller ) can not be obtained via matching and thus consistent measurement results. In principle, both the adjusted - present-value (APV ) method, the weighted - average cost of capital (WACC ) method and the equity method with the same assumptions and consistent application must lead to the same evaluation result. In practice, however, often deviate in particular those determined according APV method corporate values of those that are based on the WACC or equity method. These deviations arise especially when the cost of debt do not meet the risk-free interest rate, fluctuating debt stocks exist or if it is assumed in the perpetuity of growth. The cause of such inconsistencies is usually that the formulas used to adjust the beta factors are applicable only under certain restrictive assumptions on the capital structure, but which are not met in many cases reviewed. What formulas are to be used for determining the cost of capital in order to achieve consistent evaluation results from the concurrent use of different DCF method, the following tabulation can be removed. The theoretical background is in Enzinger / Kofler " DCF method: Adaptation of beta factors for achieving consistent evaluation results " above.