Letter to the Editor: more on company-specific risk

BVWireIssue #105-3
June 15, 2011

In response to last week’s item “The ‘one size fits all’ company-specific risk doesn’t exist,” Peter Butler (Valtrend) wrote regarding Jim Harrington’s comments on total beta, and his observation that the more important question is comparing the subject company to the selected comparables. “I agree,” Butler wrote. “We apparently only disagree on what you do next.” For example:

  1. You can compare your subject company to the average company in Duff & Phelps (portfolio 25) and/or Ibbotson (Decile 10) and then completely guess as to an appropriate company-specific risk premium (CSRP); or,
  2. You can use a total beta perspective, which empirically captures the total risk premium and/or CSRP for those exact same companies—some even in the same industry as your subject company—to better triangulate an appropriate cost of equity.
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