In this video on CAPM Beta, we look at the nuts and bolts of CAPM Beta.
𝐃𝐞𝐟𝐢𝐧𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐂𝐀𝐏𝐌 𝐁𝐞𝐭𝐚
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Investopedia defines beta as
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Beta is a very important measure that is used as a key input for Discounted Cash Flow or DCF valuations.
𝐅𝐨𝐫𝐦𝐮𝐥𝐚 𝐨𝐟 𝐂𝐀𝐏𝐌 𝐁𝐞𝐭𝐚
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Cost of Equity = Risk Free Rate + Beta x Risk Premium
𝐖𝐡𝐚𝐭 𝐝𝐨 𝐲𝐨𝐮 𝐦𝐞𝐚𝐧 𝐛𝐲 𝐁𝐞𝐭𝐚?
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Beta measures the stock risks in relation to the overall market.
𝐊𝐞𝐲 𝐃𝐞𝐭𝐞𝐫𝐦𝐢𝐧𝐚𝐧𝐭𝐬 𝐨𝐟 𝐁𝐞𝐭𝐚
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1. Nature of Business
2. Operating Leverages
3. Financial Leverage
𝐀𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞𝐬 𝐨𝐟 𝐂𝐀𝐏𝐌 𝐁𝐞𝐭𝐚
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1. Single measure to provide an understanding of security volatility as compared to the market.
2. Most of the investors have diversified portfolios from which unsystematic risk has been eliminated.
𝐃𝐢𝐬𝐚𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞𝐬 𝐨𝐟 𝐂𝐀𝐏𝐌 𝐁𝐞𝐭𝐚
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1. Past Performance is no guarantee of future
2. Cannot accurately measure Beta for new Stocks
3. Beta does not tell us whether the stock was more volatile during the bear phase or the bull phase.
To know more about 𝐂𝐀𝐏𝐌 𝐁𝐞𝐭𝐚, you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞: [ Ссылка ]
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