On the Instability of Betas: The Case of Spain
University of Navarra - IESE Business School
January 30, 2013
It is a big mistake to use betas calculated from historical data to compute the required return to equity. It is a mistake for seven reasons: because betas calculated from historical data change considerably from one day to the next; because calculated betas depend very much on which stock index is used as the market reference; because calculated betas depend very much on which historical period is used to calculate them; because calculated betas depend on what returns (monthly, daily, . . .) are used to calculate them; because very often we do not know if the beta of one company is lower or higher than the beta of another; because calculated betas have little correlation with stock returns; and because the correlation coefficients of the regressions used to calculate the betas are very small.
Number of Pages in PDF File: 16
Keywords: Beta, CAPM, beta-ranked portfolios, historical beta, expected beta
JEL Classification: G12, G31, M21working papers series
Date posted: February 29, 2004 ; Last revised: February 4, 2013
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