CHAPTER 11
Beta: Differing Definitions and Estimates1
Differences in Estimation of Equity Betas
Length of the Sample or Look-back Period
Frequency of Return Measurement
Modified Betas: Adjusted, Smoothed, and Lagged
Adjusted Beta Incorporates Industry Norm
“Sum Beta” Incorporates Lag Effect
“Full-Information” Equity Beta
Equity Beta Estimation Research
Appendix 11A Examples of Computing OLS Beta, Sum Beta, and Full-information Beta Estimates
Appendix 11B Estimating Beta: Interpreting Regression Statistics
INTRODUCTION
Betas for equity capital are used as a modifier to the equity risk premium in the context of the capital asset pricing model (CAPM). Beta is the sole risk measure of equity capital of the pure CAPM, the form of the CAPM most often shown in textbooks. The combination of equity beta for the subject business multiplied by the equity risk premium (ERP) for the market equals the estimated risk premium for the subject business. Equity betas increase with the risk of the business. For example, the beta of a business with greater business (operating) risk will be greater than the beta of a business with lesser business risk. Similarly, the beta of a business with more debt in the capital structure will be greater than the beta of a business with ...
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