Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation
When evaluating companies and investment plans, most analysts use a discount rate that is derived from CAPM models. The beta in these models usually represent risks and opportunities of the relative industry, with almost no attention to the risks that are already included in the beta. This ignorance...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Iran Finance Association
2019-10-01
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| Series: | Iranian Journal of Finance |
| Subjects: | |
| Online Access: | https://www.ijfifsa.ir/article_111726_fef7b736a84d3c08f94a995be6b93bc6.pdf |
| _version_ | 1811322452780777472 |
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| author | Amin Babaei Falah Maryam Khalili Araghi Hashem Nikoomaram |
| author_facet | Amin Babaei Falah Maryam Khalili Araghi Hashem Nikoomaram |
| author_sort | Amin Babaei Falah |
| collection | DOAJ |
| description | When evaluating companies and investment plans, most analysts use a discount rate that is derived from CAPM models. The beta in these models usually represent risks and opportunities of the relative industry, with almost no attention to the risks that are already included in the beta. This ignorance in risk measurement could ultimately impair shareholders value. What makes things critical is that by adjusting risks and opportunities in beta, the result of investment plans and company valuation could be much different. In this paper we use 1 to 10 years of monthly return data for all industries of Tehran Stock Exchange and Iran Fara Bourse and suggest an adjusted beta for each industry which is stripped of the dazzling effects of the debts and growth opportunities. We separately account for breaking down beta into beta of growth opportunities and beta of existing assets for each industry in various timelines between 1 to 10 years. Our results showed that the beta of growth opportunities is bigger than the beta of assets for almost all industries. The mentioned betas can make a big difference in cost of capital and we suggest using them when evaluating investment plans, development plans, valuation of companies and even start-ups. |
| first_indexed | 2024-04-13T13:35:23Z |
| format | Article |
| id | doaj.art-fcf351fffef743dc906698aed177b561 |
| institution | Directory Open Access Journal |
| issn | 2676-6337 2676-6345 |
| language | English |
| last_indexed | 2024-04-13T13:35:23Z |
| publishDate | 2019-10-01 |
| publisher | Iran Finance Association |
| record_format | Article |
| series | Iranian Journal of Finance |
| spelling | doaj.art-fcf351fffef743dc906698aed177b5612022-12-22T02:44:48ZengIran Finance AssociationIranian Journal of Finance2676-63372676-63452019-10-013412210.22034/ijf.2020.213958.1102111726Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculationAmin Babaei Falah0Maryam Khalili Araghi1Hashem Nikoomaram2Ph.D. Candidate, Department of Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran.Assistant Prof., Department of Business Management, Science and Research Branch, Islamic Azad University, Tehran, Iran.Prof., Department of Accounting, Science and Research Branch, Islamic Azad University, Tehran, Iran.When evaluating companies and investment plans, most analysts use a discount rate that is derived from CAPM models. The beta in these models usually represent risks and opportunities of the relative industry, with almost no attention to the risks that are already included in the beta. This ignorance in risk measurement could ultimately impair shareholders value. What makes things critical is that by adjusting risks and opportunities in beta, the result of investment plans and company valuation could be much different. In this paper we use 1 to 10 years of monthly return data for all industries of Tehran Stock Exchange and Iran Fara Bourse and suggest an adjusted beta for each industry which is stripped of the dazzling effects of the debts and growth opportunities. We separately account for breaking down beta into beta of growth opportunities and beta of existing assets for each industry in various timelines between 1 to 10 years. Our results showed that the beta of growth opportunities is bigger than the beta of assets for almost all industries. The mentioned betas can make a big difference in cost of capital and we suggest using them when evaluating investment plans, development plans, valuation of companies and even start-ups.https://www.ijfifsa.ir/article_111726_fef7b736a84d3c08f94a995be6b93bc6.pdfsystematic riskgrowth opportunitiesevaluationbeta |
| spellingShingle | Amin Babaei Falah Maryam Khalili Araghi Hashem Nikoomaram Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation Iranian Journal of Finance systematic risk growth opportunities evaluation beta |
| title | Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation |
| title_full | Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation |
| title_fullStr | Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation |
| title_full_unstemmed | Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation |
| title_short | Applying black- Scholes model to breakdown beta: growth options and the risk of beta miscalculation |
| title_sort | applying black scholes model to breakdown beta growth options and the risk of beta miscalculation |
| topic | systematic risk growth opportunities evaluation beta |
| url | https://www.ijfifsa.ir/article_111726_fef7b736a84d3c08f94a995be6b93bc6.pdf |
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