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Estimating the CAPM Beta for Public and Private Firms: Challenges and Solutions
Abstract
This chapter presents solutions to some challenges when calculating CAPM Beta. Three methods for calculating traditional beta are presented and illustrated through the case of Facebook. Different choices of market index, data frequency, and sample size result in different values of beta; however, in all cases beta was greater than one. The chapter explores ordinal beta as an alternative measure to treat outliers in both developed and thin markets. Using a sample of 84 US stocks, there was no statistical difference between median traditional and ordinal betas. This was not the case for a sample of 47 Colombian stocks, which questions the usefulness of traditional beta in thin markets. In contrast with median traditional beta, median ordinal beta did not change significantly as a result of irregular data series. The contrary occurred when the observation (sampling) period was reduced; this leaves open the question of subjectivity when defining such period. Finally, the process of valuing a private company was illustrated through the case of Palmoil Ltd., a Colombian company.
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