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How would you calculate beta for a company?

Calculating raw betas from historical returns and even projected betas is an imprecise measurement of future beta because of estimation errors (i.e. standard errors create a large potential range for beta).

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Question added by Ihab El Mortada , Business Development Manager , Fookis Labs
Date Posted: 2014/04/26
Ihab El Mortada
by Ihab El Mortada , Business Development Manager , Fookis Labs

Calculating raw betas from historical returns and even projected betas is an imprecise measurement of future beta because of estimation errors (i.e. standard errors create a large potential range for beta).  As a result, it is recommended that we use an industry beta. Of course, since the betas of comparable companies are distorted because of different rates of leverage, we should unlever the betas of these comparable companies as such:

  • β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]

Then, once an average unlevered beta is calculated, relever this beta at the target company’s capital structure:

  • β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)]

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