Calculating Beta Coefficients
The CAPM is an ex antemodel, which means that all of the variables represent before-
the-fact, expectedvalues. In particular, the beta coefficient used by investors should re-
flect the expected volatility of a given stock’s return versus the return on the market
during some futureperiod. However, people generally calculate betas using data from
some pastperiod, and then assume that the stock’s relative volatility will be the same in
the future as it was in the past.
Table 3-4 shows the betas for some well-known companies, as calculated by two
different financial organizations, Bloomberg and Yahoo!Finance. Notice that their es-
timates of beta usually differ, because they calculate beta in slightly different ways.^10
Given these differences, many analysts choose to calculate their own betas.
To illustrate how betas are calculated, consider Figure 3-10. The data at the bot-
tom of the figure show the historical realized returns for Stock J and for the market
over the last five years. The data points have been plotted on the scatter diagram, and
a regression line has been drawn. If all the data points had fallen on a straight line, as
they did in Figure 3-9, it would be easy to draw an accurate line. If they do not, as in
Figure 3-10, then you must fit the line either “by eye” as an approximation, with a cal-
culator, or with a computer.
Recall what the term regression line,or regression equation,means: The equation Y
a bX e is the standard form of a simple linear regression. It states that the depen-
dent variable, Y, is equal to a constant, a, plus b times X, where b is the slope coeffi-
cient and X is the independent variable, plus an error term, e. Thus, the rate of return
on the stock during a given time period (Y) depends on what happens to the general
stock market, which is measured by X M.
Once the data have been plotted and the regression line has been drawn on graph
paper, we can estimate its intercept and slope, the a and b values in Y a bX. The
intercept, a, is simply the point where the line cuts the vertical axis. The slope coeffi-
cient, b, can be estimated by the “rise-over-run” method. This involves calculating therCalculating Beta Coefficients 127TABLE 3-4 Beta Coefficients for Some Actual CompaniesBeta: Beta:
Stock (Ticker Symbol) Bloomberg Yahoo!Finance
Amazon.com (AMZN) 1.76 3.39
Cisco Systems (CSCO) 1.70 1.89
Dell computers (DELL) 1.39 2.24
Merrill Lynch (MER) 1.38 1.57
General Electric (GE) 1.18 1.18
Microsoft Corp. (MSFT) 1.09 1.82
Energen Corp. (EGN) 0.72 0.26
Empire District Electric (EDE) 0.57 –0.12
Coca-Cola (KO) 0.54 0.66
Procter & Gamble (PG) 0.54 0.29
Heinz (HNZ) 0.26 0.45Sources: http://www.bloomberg.comandhttp://finance.yahoo.com.(^10) Many other organizations provide estimates of beta, including Merrill Lynch and Value Line.
To see updated estimates,
go to http://www.
bloomberg.com, and enter
the ticker symbol for a Stock
Quote. Beta is shown in the
section on Fundamentals.
Or go to http://finance.
yahoo.comand enter the
ticker symbol. When the
page with results comes up,
select Profile in the section
called More Info. When this
page comes up, scroll down
until you see beta in the
section called Price and
Volume.