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Asset Betas

What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe the process step by step.

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Solution Preview

First, let's understand what beta is --- it is a measurement of the volatility of the firm's assets (their portfolio of investments) to the performance of the market in general. The market becomes the benchmark by which the asset(s) are measured, and the representative indices used for this measurement is generally the financial market place, such as the S&P 500.

Some companies which might use this for measurement purposes include:

* a company where the asset moves in opposite direction of the market index --- gold would qualify here as an asset which tends to move in an opposite direction of the stock market --- so mining types of firms would have interest here.

* firm where the movement of the asset is not correlated to the movement of the benchmark --- a fixed yield asset whose growth is not related to the movement of the stock market in general --- bonds

* where the movement of ...

Solution Summary

This case deals with calculating and describing the relation of beta for asset structure to the performance of the firm to the industry in general. It reviews the definition and impact of beta as it relates to investment grade situations, and reflects on the soundness of how to use beta as a financial tool.