Beta coefficient and company size - Investments

Beta coefficient and company size

It is intuitively clear that the larger the company, the more geographically and productively it is diversified and, accordingly, its sensitivity to market movements is less (and therefore, the beta coefficient is less). Numerous estimates for linking the size and beta coefficient are being built by many analysts, but the estimates of the analytical company Ibbotson Associates, which is now part of the group Momingstar Investment Management. on a wide range of investment issues, and in particular, for many years has been engaged in identifying premiums for the risk of small size public companies in the US market. Ibbotson Associates calculations are based on historical data on the yield of shares traded on the New York Stock Exchange since 1926. The methodology is based on the arrangement of these shares in 10 portfolios based on the decile groups and on the portfolios of the beta coefficient (Table 1). 18.3). The findings are regularly published in the analytical yearbook Ibbotson Associates . In Table. 18.3 shows prizes in ten groups, as well as premiums on aggregated three groups.

Table 18.3

Dependence of beta on company size and premium for size

Decile group

Beta

Premium,%

1: 65% of the capitalization

0.90

-0.36

2: 14.5% of the capitalization

1.04

0.47

3: 7.66% of the capitalization

1.09

0.77

4: 4.62% of the capitalization

1.13

1.13

5: 3.03% of the capitalization

1.16

1.72

6: 2.04% of the capitalization

1.19

1.52

7: 1.38% of the capitalization

1.24

1.65

8: 0.91% of capitalization

1.28

2.47

9: 0.56% of the capitalization

1.35

2.65

10: The smallest 0.25%

1.46

5.78

Mid-Cap 3-5 15.31% of the capitalization

1.12

1.04

Low-Cap 6-8 4.33% of the capitalization

1.22

1.75

Micro-Cap 9-10 0.81% of the capitalization

1.38

3.47

The premium for market risk (average arithmetic over risk-free profitability) according to Ibbotson Associates is 5.1% for large companies and 10.7% for public small companies (9- and 10-decile group).

Similar calculations are provided by the methodology of the consulting company PwC through the allocation of 25 groups (portfolios) based on different allocation criteria (revenue or balance sheet total capital). The premium for large companies is estimated at 4.6% (if the criterion is used for dividing by the book value of invested capital) and 6.5% for grouping by revenue, premium for small companies (25th group in the PwC methodology) in the corresponding grouping criteria is much higher - 15.83 and 13.55% respectively.

Another example of identifying premiums for size is the evaluation by the Fam - French model. K. Franch collected data on the dynamics of premiums for size. According to the authors of the model for the long period of observations (1927-2012) for the US market, the average premium for the premium is 3.58%, the premium for market risk (MRP) is 8.08% with a risk-free rate of 3.59%; for the global market (23 countries from 4 regions from 1991 to 2012), the average premium for the premium is 1.52%, the premium for market risk is 6.02% with a risk-free rate of 3.16%.

The three-factor model of Fama-French (taking into account the premium for size) is described in more detail in paragraph 19.4, and the four-factor model (taking into account the "momentum" effect in stock pricing - in paragraph 19.5).

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.