Confused? The Beta of Yahoo is 0.81 The Beta of Google is 1.11 Shouldn’t the Beta of yahoo be higher than google, as yahoo had a near death experience which means investors would require more premium?
Near death experience would be an alpha factor, not a beta. Beta just tells you how the stock reacts to factors that are common to the stocks in general. Also, yahoo and google may have different debt levels, which also affects beta.
@ bchadwick; Beta is not affected by debt levels; unless I was asleep in Risk Mgmt class. Beta only considers stock price movements in the form of covariance and variance in relation to the market and the particular security. If you are referring to some indirect relationship between debt levels and stock price movements, please explain?
@achilles, Where did you get your beta numbers from? You need to understand over what period they are looking the relationship between these stock prices. I would say calculate your own beta numbers and see. Another way to calculate beta using excel is to use the Analysis Tool Pak and select Regression. Once you select your two data sets beta will be the coefficient of your independent variable (particular stock). This method using excel provides a pretty good estimate. If I get time today; I’ll run Yahoo and Google’s beta
@Zesty, financial leverage does changed the observed beta. Do a search on “Levered and Unlevered Beta” Levered beta is what you observe in the market viz covariance with the market portfolio. Unlevered beta is what the beta of the stock would be if the company were financed with 100% equity. Unlevered beta gives you a sense of how much of beta comes from business risk vs financial risk. You can have a company in a very safe, stodgy, and tame industry, but if the company is levered 30-1, the stock will still fluctuate wildly and contain a lot of market risk. Investopedia has a blurb on it too: http://www.investopedia.com/terms/u/unleveredbeta.asp When I took the CFA exams, this was a Level II issue. I think they’ve pushed it back to Level I now.
Also remember that beta is affected by two things 1) correlation with the market portfolio (most people think this is what covariance means, but it’s not quite right), and 2) relative volatility with the market portfolio (which is sort of included in covariance). Adding financial leverage to a company does not change its correlation to the market, but it does change the relative volatility, much like buying on margin does not change the stock’s correlation to the market, but will change your risk levels.
@bchadwick, That’s interesting but not pertinent to our discussion. We were talking about Beta (which is general term for what you would call Leveraged Beta). Achilles is not comparing leverage beta to unleveraged beta; therefore if you are looking at the leveraged beta of two securities with different debt levels what suggests that there is a relationship between the debt levels of two securities and their beta? You are suggesting that there is a relationship unless I did not understand what you wrote. In other words; in terms of leveraged beta how does debt levels across industries determine beta? Utility company could have high debt but low beta; Retail store could have high debt and high beta. How can you assign debt levels are an predictor or indicator of beta across sectors?
@bchadwick, Yes, changes in financial leverage “can” (I say can because it may not) change a stock volatility but what correlation or relationship are you asserting exist? Are you saying that increases in debt will increase volatility and therefore increase beta. I would not agree with such an assertion due to the varying nature of particular equities and the markets reaction to debt issuance. e.g., Microsoft issuing debt recently did not change volatility but if Blockbuster was to issue debt I would venture to guess that this would In other words, without empirical data you are simply providing an unfounded blanket generalization.
lemme summarize Zesty’s point for you bchad so that you can understand - leveraged beta is not affected by leverage. yeah that sounds about right
@Mobius Striptease, that’s not what I’m saying genius! I’m saying leverage is not a determiner of the relationship of two equities betas across sectors/industries! I.e., if you were to look at all securities you would find securities with high leverage and low beta or high leverage and high beta.
Debt levels are industry specific; you understand that strip tease genius?!
Besides the academia, Google in general is a much more voliatile stock, just most of its voliatiliy has been the positive side. Yahoo stock did nothing for many years before it died down. Chart both versus an index.
Zesty, just stop…
^lol! That’s what happens when you don’t get enough mental stimulation at work.
Jscott24 Wrote: ------------------------------------------------------- > Zesty, just stop… This.
Wow, I never thought I’d see the day where people were arguing over the driving forces of a stocks beta. only on AF…
Zesty must just like to argue. Weren’t you the guy that was trying to convince me that oil and gasoline couldnt have a price divergence due to limited refining capacity?
bchadwick is correct, leverage affects the beta of a stock. Also, keep in mind that a historical beta is just a statistic, a point estimate. How the stock has moved relative to the market over the past 36/60 months (or whatever time period you are observing) is based on a wide variety of factors. So be careful when thinking about beta as an absolute answer to how risky a firm is.
Zesty Wrote: ------------------------------------------------------- >if you were to look at > all securities you would find securities with high > leverage and low beta or high leverage and high > beta thanks for that insight, Master of the Obvious. and how does that prove that when comparing equity betas among securities, you can ignore the individual companies’ financial leverage? end of this thread.
artvandalay Wrote: ------------------------------------------------------- > bchadwick is correct, leverage affects the beta of > a stock. Also, keep in mind that a historical beta > is just a statistic, a point estimate. How the > stock has moved relative to the market over the > past 36/60 months (or whatever time period you are > observing) is based on a wide variety of factors. > So be careful when thinking about beta as an > absolute answer to how risky a firm is. Another thing to consider is that prices generally react to relative performance - e.g. relative to expectations. So a firm that has great financial results all the time may not necessarily represent a better investment if that high level of performance is reflected in current expectations.