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CAPM Beta Definition (Formula, Examples) CAPM Beta Calculation in Excel - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of Wallstreetmojo friends today we
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are going to learn tutorial on CAPM that
is the capital asset pricing model the
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beta that's we are going to learn will
be learning definition formulas and how
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it is calculated on the excel so when we
invest in stock market how do we get to
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know that stock A is less risky than
stock B what is the case what is the
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reason difference can arise due to the
market capitalization revenue size
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growth management etc so can we find a
single measure which tell us which stock
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is more risky the answer is yes and we
call that as CAPM that is a capital
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asset pricing model asset pricing model
beta or capital asset pricing beta
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pricing model beta you can say in this
tutorial we are going to really look at
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couple of things we'll start with the
definitions let's begin the first
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definition of CAPM beta CAPM beta so it
is basically a measure of volatility or
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systematic risk of a security or a
portfolio in comparison to the market as
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a whole beta is very important measure that is
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used as a key input of the DCF valuation
if you wish to learn DCF you can go on
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and learn in the investment banking
course there in which is available in
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wallstreetmojo see now CAPM beta
formula that's the second thing that we
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are going to learn that is the formula
if you have a slightest of the hint
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regarding the DCF modelling then you
would have heard about the capital asset
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pricing model that calculates the cost
of equity now if you calculate the cost
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of equity as for the books then you know
this cost of equity is equal to you can
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say the risk-free rate that is the RF
plus you have to multiply beta into the
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risk premium so this is going to be a
cost of equity
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now the risk-free rate over here you can
say I'll show you know in a diagram as
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you can see the risk-free rate plus beta
into this premium this is basically the
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government's rate that is at regenerated
the rate on investor expects from the
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completely risk-free investment and
should be current cash flow beta is your
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sensitivity it is a function of both the
business risk as well as the financial
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risk consider everything beta is a
measure of systemic risk which will
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study risk premium is basically the
extra gain that your you're getting
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because of taking the risk apart from
the risk-free rate as your risk premium
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so investing in stock market is it
riskier than the investing in government
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bond investor expects a higher return to
reduce induce them to take the higher
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risk of investing in equities so if you
have not heard about beta yet then you
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need not worry
this tutorial will explain you about the
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beta in the most basic way let us take
an example when we invest in stocks it
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is but human to pick stocks that have
highest possible returns however if one
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chases only returns then the other is
corresponding elements is missed that is
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we are talking about over here is risk
so actually every stock is expected to
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have two types of risk one is non
systematic risk then another a
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systematic risk we'll discuss both of
them non systematic risk includes the
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risk that a specific two company or
industry this kind of risk can be
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eliminated through diversification and
you can say this car across the sectors
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and companies the effect of the
diversification is that the diversifiable
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risk of the various equities
can offset each other systemic risk are
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the those risk that affects the overall
stock market systemic risk can be cannot
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be mitigated through diversification but
can be well understood why are an
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important risk measure that is called as
beta approaches none so now what is beta
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beta definition beta is a measure of the
stock risk in relation to the overall
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market as you can see over here in the
diagram return on the stock over the
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risk for a return Beta 2.0 this is
1 below that is 0.5 and this is the
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risk of the market or the risk-free rate
so this is higher beta is higher risk a
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lower beta is lower risk this is in the
indifference point beta 1 over here of
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the stock is the 1 that is has the
same level of the risk and the stock
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market hence if the stock market Nasdaq
on NYC rises up by 1% then the
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stock price we will also move by 1% the stock price will and if the
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stock market moves down by 1% the stock price will the stock price
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will also move down by 1% so if
market in store price stock price will
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also vary in this case if the beta is
greater than 1 that is 2 over here if
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the beta of the stock is greater than 1
then it implies that the higher level of
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risk and volatility as compared to the
stock market though the direction of the
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stock price changes will be same
however the stock price movements would
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be greater than the extremes like for
example assume that the beta of let's
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say there is an ABC stock is two over here
then if the stock market moves up by
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let's say 1% let's say it goes
up by 1% then the stock price of
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ABC will move by 2% higher that
is 2 is a beta so the stock price of
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ABC will move by the 2% higher
returns in the risk market however if
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the stock price moves down by 1%
the stock price of ABC will move down by
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2% thereby signifying higher
downside risk as well if the beta is
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greater zero and less than one that is beta is
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0.5 if the beta of the stock is
less than 1 and greater than 0 it
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implies that the stock price will move
with the overall market however the
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stock price will remain less risky and
volatile like for example if the beta of
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the stock of XYZ is 0.5 it means that
the overall market moves up or down by
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1% exit price will show an
increase or decrease in by 0.5%
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