Revisiting Total Beta

Business Valuation Review, Vol. 28. No. 4, 2009

25 Pages Posted: 27 May 2011

Date Written: October 1, 2009

Abstract

While thousands of pages have been written by academia and practitioners about common ordinary Beta, little has been written about Total Beta. Extant writing on Total Beta is, primarily, a good mix of confusion over: (1) what Beta is supposed to represent; (2) the proper use of statistical methods to construct it; and (3) whether or not we should include the risk related to undiversified investors (investor-specific risk) in the definition and calculation of Beta. This paper proposes to concentrate on these three central issues and demonstrate why Total Beta is not the resolution of any of them. Since an accurate critique of new theory/practice depends on a thorough grasp of traditional theory, we provide a basic “refresher course” in the foundational definitions and concepts underlying modern portfolio theory and statistics that pertain to Beta. We then seek to understand the derivation and meaning of Total Beta, as presented in the literature, and offer a rigorous critique that will enable the reader to properly assess this concept, its relevance and usefulness.

Keywords: Beta, Total Beta, Modern Portfolio Theory, Cost of Capital, Private Company Beta

JEL Classification: G10, G12

Suggested Citation

von Helfenstein, Sarah, Revisiting Total Beta (October 1, 2009). Business Valuation Review, Vol. 28. No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=1851946

Sarah Von Helfenstein (Contact Author)

Value Analytics & Design LLC ( email )

One Broadway, 14th Floor
Cambridge, MA 02142
United States
6174011122 (Phone)

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