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— Objective: to understand the valuation of public
companies and the principles of diversification of equity
assets in order to translate these principles to private
company valuation and implications for the diversification
strategy of private company stockholders
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— ën finance, the à  (G^ of a stock or portfolio is a number describing the relation
of its returns with that of the financial market as a whole.[1]
— Ñn asset has a Beta of zero if its returns change independently of changes in the
market's returns. Ñ positive beta means that the asset's returns generally follow the
market's returns, in the sense that they both tend to be above their respective
averages together, or both tend to be below their respective averages together. Ñ
negative beta means that the asset's returns generally move opposite the market's
returns: one will tend to be above its average when the other is below its average.[2]
— The beta coefficient is a key parameter in the capital asset pricing model (CÑ ^. ët
measures the part of the asset's statistical variance that cannot be removed by the
diversification provided by the portfolio of many risky assets, because of the
correlation of its returns with the returns of the other assets that are in the
portfolio. Beta can be estimated for individual companies using regression analysis
against a stock market index.
— Diversified investors can diversify away Non Systemic Risk but have to handle
Systemic Risk

— Expected Re= Rf + ¢ü(Rm-Rf^


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— utual funds are believed to include all principal asset classes as per S&
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between asset returns and the market marker (S& , SCë,
Dow Jones, etc.^ but does not consider Strength of Fit
(R2^ which illustrates the degree of correlation between
the regression equation and the market marker
— Beta·s R2 are generally between 0.4 and 0.8
— Betas vary ² in some cases significantly ² over the
medium and long terms and according to the time span
measured
— The change in Beta can impact valuations enormously
because of the Re applied

 
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— Source:Yahoo Finance, Ñnalisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
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— Source: Yahoo Finance, Ñnalisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
  

  
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— Source: Yahoo Finance, Ñnalisis Lambda


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— Source: Yahoo Finance, Ñnalisis Lambda, based on 30 assets from 2007-2010 ; 40-60 observations each
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— Expected Re= Rf + ¢ü(Rm-Rf^
— Re impacts not only the discount rate for the estimated cash
flows, but also the estimation of the perpetuity cash flows
leading to a double impact on values

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— Source:Yahoo Finance, Ñnalisis Lambda


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— Source: Yahoo Finance, Ñnalisis Lambda


  
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Long term, Beta values vary significantly for individual assets

— Source:Yahoo Finance, Ñnalisis Lambda ü Rolling 36 month Betas vs 12, 24, 36 and 48 month Betas
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— Source:Yahoo Finance, Ñnalisis Lambda ü Rolling 36 month Betas


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ë Random portfolio has same Ñverage Return as S& with


similar Std Dev, but much lower Beta
ë Ñssets with low correlation to S& receive low Betas
ë Dephased S& has same Ñverage Return and Std Dev but
much lower Beta
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— Ñctive investors in firms ²
publicly traded or not-
whose portfolio is not
diversified

— ëndividuals or institutions
looking to evaluate
investments as a stand
alone proposition,
independent of other
portfolio holdings
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— Systematic Risk (Beta^ X Beta R2 ëRandom portfolio has same Ñverage
= Contribution to total risk Return as S& with similar Std Dev,
— ëdiosyncratic Riskü X (%-Beta R2^ but now has Total Risk in line with Std
Dev
= Contribution to total risk
ëDephased S& has same Ñverage
— Total Risk = Sum of both above Return and Std Dev as S& but now
ü Defined as Std Dev of Ñsset/Std Dev of S& has similar Total Risk measurement
(as arket arker^

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