theyfeelarenecessarychangestomakethembetterestimates
forthefuture.Ingeneral,betasreportedbydifferentservices
for the samefirm can be very different because they use
different timeperiods (someuse twoyears andothers five
years);differentreturnintervals(daily,weekly,ormonthly);
different market indices; and different postregression
adjustments.
29 While thesebetadifferencesmaybe troubling,thebeta
estimates delivered by each of these services come with
standard errors, and it is very likely that all of the betas
reportedforafirmfallwithintherangeofthestandarderrors
from the regressions.
Fundamental Betas
Thebetaforafirmmaybeestimatedfromaregressionbutit
is determined by fundamental decisions that the firm has
madeonwhatbusinesstobein,howmuchoperatingleverage
touseinthebusiness,andthedegreetowhichthefirmuses
financialleverage.Inthissection,weexamineanalternative
way of estimating betas, where we are less reliant on
historical betas and more cognizant of the intuitive
underpinnings of betas.
Determinants of Betas
Thebetaofafirmisdeterminedbythreevariables:(1)the
typeofbusinessorbusinessesthefirmisin,(2)thedegreeof
operating leverageinthe firm,and(3) thefirm’s financial
leverage.Whilemuchofthediscussioninthissectionwillbe
couchedintermsofCAPMbetas,thesameanalysiscanbe
appliedtothebetasestimatedintheAPMandthemultifactor
model as well.