|
Equity Beta
What is beta and what does it indicate?
Beta measures the risk of the company (and its stock)
relative to the risk of the stock market in general -
how risky is the type of business the firm does and how
risky is the financial structure or leverage of the firm.
With greater risk, as measured by a larger variability
of returns (business or operating risk), the company's
should have a larger beta. And with greater leverage (higher
debt to value ratio) increasing financial risk, the company's
stock should also have a larger beta.
With a larger beta, an investor should expect a greater
return. The beta of an average risk firm in the stock
market is 1.00. Normally betas vary between 0,60 - 1,30,
although they also can be much higher or lower.
Beta values of some businesses
These values are for your guidance, but they are not
valid as they are. They should give you some direction
of what could your company's beta be. You might want to
use them as a starting point - after that you can consider
other significant factors and modify your company's beta
from that of subjective industry. Other important components
that should be considered when "fine tuning"
beta of your company can be found from the following chapter,
beta and risk components.
|
Beta
|
Unleveraged
beta
|
Internet
|
1,51
|
1,50
|
| Semiconductor |
1,34
|
1,31
|
| Telecom equipment |
1,21
|
1,17
|
| Computer software
& services |
1,20
|
1,20
|
| Air transport |
1,10
|
0,83
|
| Drug |
1,06
|
1,04
|
| Retail store |
1,05
|
0,95
|
| Furniture, home |
0,90
|
0,82
|
| Railroad |
0,87
|
0,65
|
| Textile |
0,82
|
0,49
|
| Beverage |
0,80
|
0,73
|
| Food wholesale |
0,80
|
0,66
|
| Tobacco |
0,75
|
0,68
|
| Real Estate |
0,74
|
0,69
|
| Food processing |
0,72
|
0,63
|
| Electric utility |
0,60
|
0,40
|
Beta and risk components
The following list has some components you might want
to consider when you estimate beta of your company. The
weight of each component is set to be 20 % - this is just
one way to look at risks / beta, not the only or necessary
correct way. The most important thing in this table that
you recognize also these factors.
| |
Some risk components to think about (weight):
|
 |
Financial leverage (20 %)
|
|
Size (20 %)
|
|
Valuation (20 %)
|
|
Subjective Industry / Business (20 %)
|
|
Subjective Company (20 %)
|
|
