NOPAT Forecast CAGR (10y)

Beta measures the risk or volatility of a company’s share price in comparison to the market as a whole. For example, a company with a beta of 1.1 will theoretically see its stock price increase by 1.1% for every 1% increase in the market. Put differently, if you’re expecting the overall market to return 8%, a stock with a beta of 1.5 should return 12%.

Beta is an important metric used in the Capital Asset Pricing Model (CAPM) to effectively calculate a company’s cost of equity that in turn, is applied in numerous valuation models.

A company’s beta can be calculated from market observations. However, since leverage (debt) can have a significant impact on a company’s stock price, one needs to unlever the beta to remove these effects. The unlevered beta can then be analyzed against the unlevered betas of comparable companies that operate in a similar industry. This allows an analyst to select the appropriate beta the represents the true risk of operating in that industry. This process is illustrated below.

Aswath Damodaran, a professor at NYU Stern, also publishes Industry Betas.