Computing the asset beta in the CAPM
Hey guys,
I am confused as to how you calculate the asset beta in the CAPM for the purposes of calculating the cost of capital for a project?
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Beta is the regression coefficient of a security against the market. For example, a linear regression will yield y=alpha+beta(*)x+episilon. Alpha is the y intercept and should theoretically be zero (if it is not zero, it is yielding abnormal returns), beta is the said security's sensitivity to movements in the market, it is the slope of the line, x is the excess market return (market-risk free rate) and epsilon is an error term (random variable, generally normally distributed).
To find these things either run a regression or pull it from capiq/bloomberg/yahoo finance, which is what most people do.
It's been a while, so someone please correct me if I overlooked something.
Beta(asset)= Beta(Equity)[1/1 + (1-t)D/E)]
where t= marginal tax rate, and Debt to Equity Ratio is the industry standard (or a similar company's ratio, etc)
Asset beta is the same thing as unlevered beta. It is the opposite of the Hamada equation
But if Asset beta is the same thing as unlevered beta, doesn't that mean I use the Hamada equation?
Sorry guys, but I am still confused. So what exactly are the steps one exactly undertakes to compute the asset beta in the CAPM?
Asset Beta = Equity Beta * % of equity in capital structure + Debt Beta * % of debt in the capital structure
For inv-grade debt, beta is usually taken as 0, and so Asset Beta = Equity Beta * % of equity in capital structure (aka E/E+D or E/V).
So let's say the equity beta is 1.5, and equity represents 50% of the company's capitalization. Asset beta would be 0.75.
Not sure about leveraged companies' debt betas.
Similarly, if given anything in that formula, you can isolate and find other inputs (as long as you remember your algebra)
Whops, obviously was talking about basic equity beta – I should have read the question more carefully.
Assalam-u-Alaikum I want to know that how to calculate asset beta using equity beta, debt in million and equity in million Regards: Muti ur Rahman
Question about Calculating Beta (Originally Posted: 04/21/2008)
When calculating beta by doing a regression against the market (S&P500 for example), how would you set up a hypothesis test with either a confidence interval or a p-value test to determine if the stock is more or less risky than the market with, say, 95% confidence? Thanks in advance for your help.
a) thanks for semi-stealing my user name
b) you can do this several ways. i'm assuming you're using excel, because otherwise, wow that's a headache...so here goes...
simple way to get a beta: create two columns with teh adj close prices and then in a new box enter correl(__, ___) putting in the arrays where the blanks are ie. a1:a31 for a month or however long your data is
more complex: go to excel options, and you'll find a place to install plug ins. install data analysis, run that, and put your variables in the x/y spots. Your beta and alpha will be calculated for you as well as r-squared etc
you theoretically can also do a regression graph and calculate the slope/etc in excel
all will give you within a very small number the same thing so its kinda depends on how much info you need
c) good luck
Thanks!! I get the calculation of beta itself, I'm more uncertain about the confidence interval/p-value test to determine with statistical significance whether the stock is more or less risky than the market. Any advice on that?
getting some help on your math 312 final project??? well now it's known what you're presenting
At the risk of stating the obvious, a Beta 1 is less risky than the market, beta = 1 is equally risky and a beta > 1 is riskier than the market.
You can use your p-value to determine the highest confidence interval that the regression is statistically significant at by subtracting the p-value from 1 (1-p). For example, if your p-value is .01, that means the test is relevant at a 99% confidence interval.
H0: Beta = 0 H1: Beta not= 0
if p0.25 reject null hypothesis. therefore beta is significant and can be used as a good indicator to determine riskiness of the stock.
I pulled that out of my old notes and just wrote down whatever little sense I could make out of it. Hope that helped.
p.25 is far too large for any meaningful significance. Try .05.
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