Originally Posted by
gregrday
@Sauce,
my understanding of beta is its fundamentally nothing to do with shareprice, but based on the efficient market hypothesis (bull$#!t), the shareprice always reflects correct value, and therefore variations in shareprice are supposed to represent real changes in value. When in fact they appear to reflect ... a whole lot of noise.
Damodaran suggests that betas consist of 3 variables. 1. The type of business, 2. Operating leverage, and 3. Financial leverage (debt-to-equity). So from 1., cyclical companies are more prone to reacting to external market conditions, so higher beta. 2., Operating leverage is fixed costs/total costs. The higher those fixed costs, the less... flexibility the firm has, so higher beta. 3... higher debt leverage means higher variability in income (like trading on margin!).
I'm not quite at the point of estimating my own betas, but might be fun on a rainy afternoon!
cheers
Greg