Size-adjusting Volatility

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Fall 2018 Volume 37, Issue 3 pp. 117-121
Vincent Covrig, Ph.D., CFA
Daniel L. McConaughy, PhD, ASA
Mary Ann K. Travers, ASA
valuation methods & approaches
monte carlo, option price modeling, size effect, equity risk premium (ERP), black scholes option pricing model, put option, equity volatility, merton model, volatility

Summary

Since the valuation of corporate securities with option-like features issued by the private companies requires an estimate of volatility based upon comparable public companies and the comparable companies are often larger, the use of unadjusted volatilities may understate the volatility of the subject private company. This article provides an up-to-date research review on the need for size-adjusting volatility. We also present a simple methodology to size adjust comparable companies that is easily updated with data contemporaneous to the valuation date.
Size-adjusting Volatility
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