On the Instability of Betas: The Case of Spain

Abstract:     
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, M21

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