Resources

• Aswath Damodaran’s PPT

• Start of the class

• Syllabus

• Post Class Test & Solution

Regression Betas are betas that are basically a Return vs Return of the stock vs the index. There are multiple questions here: which index? and why?

Remember, R squared is a measure of how the portfolio is affected by price changes in the index. Higher the number, higher this relation. We always think that a higher R squared will give us the right answer.

You know what is the right answer? Both are screwed up. They are all crappy.

Reasons to hate BETAs

Reasons to hate BETAs:

1. It ignores cost of equity adjusted for risk, which is not how you should do valuation. Every company is not equally risky.
2. Intrinsic valuation should use an intrinsic measurement, not a pricing-based measure of risk.
3. Betas do not reflect the risk faced by the average investor since the marginal investor is diversified, and so we put focus on risk that cannot be diversified in the market.
4. Regression betas are backward-looking and noisy.

To measure relative risk, you can use the standard deviation of returns or the downside risk. The downside risk is the probability-weighted average of returns below a certain threshold.