Know thy beta (because it doesn’t always make sense)

BVWireIssue #57-2
June 13, 2007

Burkert also warned appraisers: “Know the source of your beta.”  Bloomberg and others use different measurements and observations, which could understate the beta for a smaller stock target company by as much as fifty basis points.  “This is because the lack of trading reduces covariance.”

His comments reminded us of a question that came up during Keith Pinkerton/Pete Butler’s recent telephone conference on “Quantifying Company-Specific Risk,” regarding the computation of beta.  “As you know, betas change over time,” the analysts said.  “This further supports our technique, which captures timely data and even potentially forward-looking data through the use of implied volatilities (if available). Having said that, one can calculate betas in different ways and the discrepancy can be large.”  Do betas always make sense?  No—“thus we recommend that when using this technique, analysts calculate beta themselves.  It is not hard and Capital IQ does not provide the correlation coefficient, R (at least, not on which is necessary to calculate Total Beta.”

Free download:  Because of the continuing interest in the Pinkerton/ Butler total beta technique, we’ve put together their BVU original article together with two follow-up Q&A’s into a free download, available here.  Notably, we’ve just learned that the Pinkerton/Butler duo will be presenting their technique during Roger Grabowski’s day-long Cost of Capital seminar preceding the ASA BV conference in San Diego in late October.  Details will be available soon; for a full line-up of the 2007 ASA International Appraisal Conference, July 15-18 in Hollywood, California, click here.

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