β
Beta
Short definition
Beta is the share’s systematic sensitivity to the market portfolio. In CAPM the risk premium is β × ERP. 1.0 moves with the market; leverage lifts beta.
Detailed explanation
Raw beta is noisy in a thin market; peer unlever/relever can be more honest. The window and the index move beta.
Operating leverage also inflates beta. Project beta is not firm beta.
Why it matters for the CFO
It is Ke’s risk channel. A wrong beta quietly moves WACC and EV.
How it is calculated
β = Cov(r_i, r_m) / Var(r_m)
Variables in the formula
- β: Sensitivity to the market
- r_m: Market return
How to read it
β 1.2 means 20% more systematic swing than the market. In a thin market 0.4 or 2.0 is often sampling error.
Numerical example
ERP 5%, β 1.20 → beta premium = 6.0 percentage points.
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Definitions are educational. They are not investment, credit or tax advice.