Beta

Beta measures the sensitivity of a stock's returns to the broader market's returns. A beta of 1.0 means the stock moves one-for-one with the market on average; 1.5 means it moves 50% more, 0.5 means half as much. Mathematically, beta is the covariance of stock and market returns divided by the variance of market returns — the slope of a regression line. We compute beta from five years of monthly returns regressed against a broad U.S. equity index, which is the convention sufficient to smooth out short-term noise without losing relevance to current capital structure. Two methodological notes matter. First, raw beta tends to be unstable for individual stocks; long-run empirical evidence shows betas mean-revert toward 1.0, which motivates the 'adjusted beta' formula (typically 0.67 × raw + 0.33 × 1.0) used by Bloomberg and Merrill. Second, beta blends operating risk and financial leverage; for capital-structure scenario analysis we sometimes unlever the beta back to the asset-beta level using the Hamada equation. We use raw beta for the strict cost-of-equity case (more conservative for valuation) and an averaged adjusted beta (raw, sector, Bloomberg) for the moderate case.