Session 9: Betas - Drivers and Determinants
Vložit
- čas přidán 28. 02. 2023
- In this class, we looked past regression betas at how the choices companies make about the businesses they enter can determine their betas.. Summarizing the class, here is what we listed as the three determinants of betas:
1. Betas are determined in large part by the nature of your business. While I am not an expert on strategy, marketing or productions, decisions that you make in those disciplines can affect your beta. Thus, your decision to go for a price leader as opposed to a cost leader (I hope I am getting my erminology right) or build up a brand name has implications for your beta. As some of you probably realized today, the discussion about whether your product or service is discretionary is tied to the elasticity of its demand (an Econ 101 concept that turns out to have value)... Products and services with elastic demand should have higher betas than products with inelastic demand. And if you do get a chance, try to make that walk down Fifth Avenue...
2. Your cost structure matters. The more fixed costs you have as a firm, the more sensitive your operating income becomes to changes in your revenues.
3. Financial leverage: When you borrow money, you create a fixed cost (interest expenses) that makes your equity earnings more volatile. Thus, the equity beta in a safe business can be outlandishly high if has lots of debt. The levered beta equation we went through is a staple for this class and we will revisit it again and again. So, start getting comfortable with it.
I know that the last part of this class was a grind with numbers building on top of numbers. In specific, we looked at how to estimate the beta for not only a company but its individual businesses by building up to a beta, rather than trusting a single regression. With Disney, we estimated a beta for each of the five businesses it was in, a collective beta for Disney's operating businesses and a beta for Disney as a company (including its cash).
Slides: pages.stern.nyu.edu/~adamodar...
Post class test: pages.stern.nyu.edu/~adamodar...
Post class test solution: pages.stern.nyu.edu/~adamodar...
Thank you sir
Hi Prof I have a question. We all know that banking sector is one of the areas with highest financial leverage in the market, but also the the most regulated one. For instance, central bank normally use various ratios to monitor the liquidity and operational activities of each bank, making their business mix more safer at a certain extent. So is this fair by applying this method to calculate banks' betas or any adjustment should we make when using it?
p/s: in my country, banking sector is widely considered a most safety business model and it is almost imposible for bankrupt.
The risk concerned here is about the profitability of the bank. So even if the bank can never bankcrupt, if it's run by morons who think the government will bail them out every single time, you wont get any kind of worthwhile returns by investing in them. So be sure to check their profitability and not just whether or not they can go bankcrupt.
Hello Professor, I am valuing an Indian Private company about to go Public. I was calculating the country risk premium for the ERP, one of the methods you suggested was to adjust the default spread by (S.D. of Equity/ S.D. of Country bond). I am confused about how to calculate the deviation of T. Bond. Do I have to calculate the annualized S.D. of the Historical Yields or calculate S.D. from the returns of a bond Index?
it is always the annual return generated by a bond that is yield.
You can calculate the standard deviation of the emerging market bond index