Economic Analysis: Theory and Practice
 

Conditions for using different types of adjusted beta to calculate return on assets

Vol. 17, Iss. 9, SEPTEMBER 2018

Received: 16 April 2018

Received in revised form: 22 May 2018

Accepted: 9 July 2018

Available online: 28 September 2018

Subject Heading: MATHEMATICAL METHODS AND MODELS

JEL Classification: G11, G12, G18, G32

Pages: 1781–1796

https://doi.org/10.24891/ea.17.9.1781

Zozulya V.V. Bauman Moscow State Technical University, Moscow, Russian Federation
zva-inga@mail.ru

https://orcid.org/0000-0002-6189-8649

Korolev S.A. Bauman Moscow State Technical University, Moscow, Russian Federation
korolev-s1998@yandex.ru

https://orcid.org/0000-0003-4518-1637

Importance The article reviews different methods for beta estimation applied in the capital asset pricing model, which have been offered for the recent fifty years.
Objectives The study aims to consider the existing methods to calculate beta coefficient and set the boundaries of their application to compute the expected return on equity of Russian companies.
Methods The study uses general scientific methods of cognition, like retrospective and comparative analysis, synthesis, induction and deduction.
Results We examined existing trends in beta modification and initial limitations inherent in each model. Based on the conducted research, we offer recommendations on the choice of methods to calculate beta, depending on size and type of companies.
Conclusions The analysis shows that under the modern economy, the calculation of beta coefficient according to the traditional formula proposed by William Sharpe does not provide reliable results. To obtain adequate estimates of return on equity of small and medium-sized public companies, the lagged beta should be used. As for large companies issuing bonds, the calculations should consider the capital structure by using the model proposed by Peter Monkhouse. The results of the study may help value the business of Russian companies under the income approach.

Keywords: capital asset pricing model, adjusted beta, lagged beta, levered beta, portfolio beta

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