Beta (β): Definition and Use in CAPM
Beta measures a stock’s sensitivity to market movements. It is a key input to Capital Asset Pricing Model (CAPM) when estimating the cost of equity.
CAPM formula
Use a long-term market return premium and an appropriate risk-free rate for your jurisdiction. Beta can be estimated from regression or using provider-supplied levered/unlevered betas.
Notes
- Different datasets report levered (equity) beta or unlevered (asset) beta. Re-lever/un-lever when changing capital structure.
- CAPM is a single-factor model; practitioners may adjust the output for company-specific or macro factors when setting WACC.