Introduction to Beta in Corporate Finance

This video shows what beta is in the context of Corporate Finance. Beta is the percentage change in an asset's return, given a 1% change in the return of the market portfolio (an index such as the S&P 500 is commonly used to proxy for the market portfolio. Beta is important because it measures the amount of systematic risk an asset has. Because unsystematic risk (firm-specific risk) can be diversified away, the systematic risk of an asset is what determines the risk premium demanded by investors for holding the asset. Thus, beta can be used to calculate the cost of a firm's equity capital (for example, with the Capital Asset Pricing Model).
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[@Sophie-mv8gc]

The example was easy to follow but if I wanted to invest in a company where would I find the good and bad economy percentage?

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[@hithesh7665]

It is possible to get the percentages of a "good" and "bad" economy (but looking at a completed year of which all the stats are available) by checking the past results of a stock index such as the S&P 500 or a Stock Exchange as a whole.

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Remember to hold yourself accountable

[@JCRMatos]

Hello. Thanks for the video. I have 1 question. In my investment research I found 3 ways to calculate Beta and yours is the 4th. The ways I found where using a line regression (in Excel for example), the 2nd was using the formula beta=Covar(Returns, Market returns) / Var(Market returns) and the 3rd was beta=Covar(Returns - Rfr, Market returns - Rfr) / Var(Market returns - Rf). And now with yours counts 4. Which one is correct or which one should be used when? Thanks in advance. JM

[@Edspira]

There are multiple ways to calculate beta, which get you to the same place. For example, when you run a regression, the beta you obtain is the same as if you divided the covariance by the variance.

[@JCRMatos]

@@Edspira Hello, thanks for the reply. That is correct, line regression and the covar / var give the same value, but yours doesn't. When should I use yours instead of the line reg? Thanks. JM

[@Edspira]

In this video I just provide a simple example with a single company. My goal is not to show you how to calculate beta but to show how to understand what beta is. In this example, the beta is 2.5, which means the company is two and a half times riskier than the market portfolio. If you are trying to calculate the beta of a company in real life, I suggest regressing the monthly (or daily) excess returns of the company on the monthly ( or daily) excess returns of the market portfolio (e.g., the S&P 500).

[@JCRMatos]

Hello. Ok, thanks. JM

[@srinivasthotla8676]

do Beta values change every day for stocks?

[@theshoppersreview165]

Where did you get that 30 and 50 percent is that only an estimation?

[@azrulrhm]

eisle gomez that is historical data