Management & Financial Accounts

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CA Prabhakar Dubey (Querist)

22 November 2007
Please any one can help me how to calculate beta (B) which helps to calculate cost of equity and overall cost of capital.

K.BADRI NARAYANAN

K.BADRI NARAYANAN (Expert)

22 November 2007 Beta is a measure of risk of a security, say shares, vis-a-vis the market. The market beta is 1. If a security's beta is less than 1 it is less riskier than market. If it is more than 1 it is more riskier.

Beta is calculated my multiplying the Correlation co efficient between concerned security and market with the security Std.deviation and then dividing the resultant by market Std.deviation. Books on Portfolio Management carry practical problems. Using beta, Cost of equity can be calculated under CAPM Model.

KAAPIL

KAAPIL (Expert)

22 November 2007 Beta = Covariance / Variance

Beta = (SD of stock/ SD of markrt) * Correlation

CA Prabhakar Dubey

CA Prabhakar Dubey (Querist)

23 November 2007 Thanks Sir,

As I comes to know about how to calculate beta, please can you provide me the one example so that it will be more easier for me.

Regards Prabhakar

KAAPIL

KAAPIL (Expert)

23 November 2007 Sd of stock 10 SD of market 15.
Correlation 0.5

Beta (10/15) * 0.5
= 0.3

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