Alternative Beta Calculations
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Originally Posted by
winner69
Snoopy - you might find this document of interest - the latest PWC Cost of capital report - it lists the equity beta for most listed NZ stocks (along with their current WACC). You can have a look at the methodology on their website.
http://www.pwc.com/en_NZ/nz/cost-of-...-Sept-2009.pdf
Thanks for that reference Winner, very revealing. Here is the note on how PWC calculate their equity Beta
"Equity Beta
Equity beta estimates used in calculating our WACCs are based on an average of monthly returns over (up to) five years, blended with weekly based estimates where less than three years of data is available. The beta estimates incorporate no adjustments to historical betas as measured."
I notice the results do not strictly tie into the Reuters website results, which I guess reflects slightly different methods of calculation. The average company monthly investment performance method over five years used by PWC makes some sense. But I guess you could use a different period to five years or look at weekly not monthly returns and get a Beta different result. Here are some of those reported differences:
Company, Reuters Beta, PWC Beta
LPC: 0.28, 0.38
TUA: 0.56, 0.79
PGW: 0.77, 1.76
RBD: 0.70, 0.48
CEN: 1.04, 1.01
TEL: 1.06, 0.99
SKC: 1.13, 1.36
SCT: 1.27, 1.21
I am not sure what calculation method Reuters used.
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You mention LPC and its low beta - which it has because LPC has a steady dividend stream and is essentially priced as a bond - you get good dividends but when the market goes up the shareprice doesn't go up as fast as the market.
There is another reason for the low Beta associated with LPC. The company is almost behaving like an unlisted company because council owners control some 90% of the shares on issue. If the price goes down too much Christchurch City Holdings has been buying shares on market limiting the downside. The upside is also limited because if the Port of Otago and Lyttelton Port can reach a merger agreement the remaining listed shares could be taken out by compulsory acquisition, thus limiting upside potential for small shareholders.
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Whilst you say 'If you are worried by the excessive ups and downs of your portfolio, another solution (better IMO) would be forget about the NZX as an indicator and only select 'low Beta' shares to own' the opposite could be true in that if you believe the market is going to do OK over the next year than a selection of higher beta stocks should do well for you - such a portfolio would currently include PGW, PGC, NPX, THL, SCY and FPA
Yes although I am not sure that you can say that the Beta of NPX, PGW and PGC will not change because of their respective heavy capital reconstruction programs over the last few months. I also note the wildly different PGW Beta as published by PWC (PGW Beta = 1.76) and Reuters (PGW Beta = 0.77).
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Interesting though that it appears that ALL stocks listed in that PWC report show a positive correlation to the market
I have to admit I was surprised by that too. However, if you consider what has happened over a five year period, as PWC did, then the fact that the market has tended to go up and all shares (that have survived) tend to go up is not that much of a surprising result. It would be interesting to see what those Beta calculations would be over a shorter period, say two years.
SNOOPY
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