Skip to content
Learning that drives better investment decisions

Past Betas Tend to Regress Towards 1.0x

| |

Past betas tend to regress towards 1.0x | #ChartOfTheDay

 

  • On average 18,000 stocks listed at any point in time on any stock exchange in the world from 2002 to 2018
  • Grouped the stocks into quintiles based on the level of beta
    • Highest betas would be in the top quintile, lowest beta would be in the bottom quintile
  • Observed what happened to the average beta of these stocks over 10 years
  • Past betas tend to regress towards 1.00x
  • The beta you use for valuation is to infinity
  • To avoid mistake we use three betas: High risk: 1.25x, Average risk: 1.00x, low risk: 0.75x
  • If you use a beta outside of this range you have a higher obligation to justify

 

DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

Posted in Chart of the Day, Valuation Master Class