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					                                                                Topics covered in this Quick Guide                                          Quick Guide: Finding Beta
                                                                  What is Beta?                                                                          Spring 2008

                                                                  How do I find a company’s beta using Cutler Center Resources?
                                                                  Differences between betas in the three resources.
                                                                  How to calculate your own beta
                                                                  How to download a fundamental beta

                                                                What is Beta?
                                                                Beta (β) is a measure of volatility, or system-
                                                                atic risk, of a security or portfolio in compari-
                                                                son to the market as a whole (most people use
                                                                the S&P 500 Index to represent the market).

                                                                Beta is also a measure of the covariance of a

                                                                stock with the market. It is calculated using
                                                                regression analysis.

                                                                    A beta of 1 indicates that the security's
                                                                    price is expected to move with the market.
                                                                    A beta greater than 1 indicates that the
                                                                    security's price is expected to be more
                                                                    volatile than the market.
                                                                    A beta less than 1 means that the secu-
                                                                    rity’s price is expected to be less volatile
                                                                    than the market.

                                                                You can think of beta as the tendency of a se-
                                                                curity's returns to respond to swings in the
                                                                market. For example, if a stock's beta is 1.2,
                                                                then it is theoretically 20% more volatile than
                                                                the market.                                                           Source:
                                                 Finding Beta

                                                                Use Cutler Center Resources to:
                                                                Lookup Beta: There are several different ways to find beta using the resources at the Cut-
                                                                ler Center. This Quick Guide will show you how to find beta using:
                                                                    Bloomberg Professional
                                                                    Value Line
                                                                Each resource will provide you with varying results for the beta of a security due to differences
                                                                in the calculations used in each program. These issues are addressed in this guide.

                                                                Calculate Beta: This guide also covers how to calculate your own beta using:
                                                                    WRDS (Wharton Research Data Services)

                                                                Find Fundamental Beta: Learn about fundamental beta and how to retrieve it via:
                                                                    Northfield Portfolio Optimizer (via FactSet)
 QUICK GUIDE: FINDING BETA                                                                                                     Page 2

                        Finding Beta Using                                             Professional
                        (NOTE: Available only in the Cutler Center and Horn Library)
                        To look up the beta of a stock with Bloomberg Professional, simply enter the command:
                        {ticker symbol}           BETA

                        The following screenshot shows the result for the beta of Goldman Sachs: GS            BETA

TIP: Bloomberg
gives you the most
flexibility when
trying to figure out
the beta of a stock.
                       Using the default settings, Bloomberg performs a regression of the historical trading prices of the stock
                       against the S&P 500 (SPX) using weekly data over a two-year period. (NOTE: Depending on the secu-
                       rity, you can often find data for the past 20-25 years.)

                       The graph above shows the regression plotted. The independent variable (the index) is on the x-axis and
                       the dependent variable (the stock price) is on the y-axis. The latest observation is shown by a flashing red

                       The beta is leveraged if the firm has had long-term debt on its balance sheet for the past two fiscal years.
                       You can check to see if the firm has long-term debt by using the command:

                        {ticker symbol}           DES9

                       Bloomberg reports both the Adjusted Beta and Raw Beta. The adjusted beta is an estimate of a secu-
                       rity’s future beta. It uses the historical data of the stock, but assumes that a security’s beta moves toward
                       the market average over time. The formula is as follows:
                                                   Adjusted beta = (.67) * Raw beta + (.33) * 1.0
 QUICK GUIDE: FINDING BETA                                                                                                   Page 3

                        Using                                Professional (Con’t.): Other Data Reported
                        Alpha: The point of intersection with the y-axis.     Std Error of Beta: A 67% confidence level (or
                                                                              one standard deviation from the mean) that the:
                        R2: The coefficient of determination (r-squared).     Actual Beta = Raw Beta +/- the standard error
                        This is the percentage (in decimal form) of vari-
                        ance in the dependent variable (the stock) that can   (In the screenshot above: at a 67% confidence
                        be explained by the independent variable (the         level, it can be said that actual beta will be be-
                        index).                                               tween 1.04 +/- 0.12; or between 0.92 and 1.16.)

                        Std Dev of Error: The degree to which an indi-        Number of Points: Indicates the number of ob-
                        vidual probability value varies from the distribu-    servations used to calculate beta (the more, the
                        tion mean.                                            better).

                        Finding Beta by Using
                        (NOTE: Available only in the Cutler Center)

                        You can find beta in FactSet by opening the Company Explorer application and navigating to the Prices
                        Summary report for a particular security. The security’s beta is listed under Volatility.

FactSet can be found
on Workstations         Calculation:
#3, 4, 5, and 9-15
                        FactSet calculates the historical beta of the secu-
in the Cutler Center.
                        rity using a regression analysis of 52-week re-
                        turns of the security relative to returns the S&P
                        500. The data is updated every week, after the
                        closing price is recorded Friday evening.

                        If the stock does not have a 52-week history, the
                        calculation uses as many weeks as are available
                        for the stock.

                        Other Data Reported:
                           Alpha: The y-intercept value for the regression line for the security’s price changes versus those of
                           the index.

                             Average Price Change: This is a “moving” calculation of the average of the weekly price changes
                             of the security for the previous 52 weeks.

                             Standard Deviation: This is a “moving” calculation of the average of the standard deviations of the
                             weekly price change for the previous 52 weeks.
QUICK GUIDE: FINDING BETA                                                                                                  Page 4

                       Finding Beta by Using Value Line Research Center
                      (NOTE: Available from Horn Library website from both on and off-campus)

                      You can access Value Line Research Center through the Horn Library web site.

                      Here you can search for a company’s report
                      by name or ticker symbol. Reports are up-
                      dated quarterly. A sample report can be
                      seen on the right, with beta circled.

                      In Value Line, the beta coefficient is de-
                      rived from a regression analysis of the rela-
                      tionship between weekly percentage
                      changes in the price of a stock and weekly
                      percentage changes in the NYSE Index
                      over a period of five years. In the case of
                      shorter price histories, a smaller time period
                      is used, but two years is the minimum. The
                      betas are adjusted for their long-term ten-
                      dency to converge toward 1.00.

                       Differences between Beta on Different Resources

                      When evaluating the different options for finding beta, you may be wondering: Which one is “right?”
                      There is no right answer and there are several different methods to calculate beta. You must be aware of
                      how the different resources calculate beta and decide which one is right for you. The following list high-
                      lights some of the major differences:

                            Index Used: Bloomberg and FactSet use the S&P 500 Index as the independent variable while
                            Value Line uses the NYSE Index.

                            Time Frame: The default setting for Bloomberg sets the time frame for the data to two years, but
                            can be changed to a desired range. FactSet uses 52 weeks worth of data when calculating beta and is
                            updated weekly. Value Line use five years worth of data and is updated quarterly.

                            Calculation Method: Bloomberg and FactSet perform a regression on the weekly prices for the
                            stock and the index in a similar way that Excel would. Value Line also performs a regression but
                            does not give you detailed results about the data.

                            Historical Beta vs. Fundamental Beta: When looking for a historical beta of a stock, you can use
                            Bloomberg, FactSet, or Value Line. In Bloomberg, you would change the specified date range, how-
                            ever you may not be able to go as far back as you desire. To find the fundamental beta for a stock,
                            you can retrieve it from Northfield Portfolio Optimizer accessed via FactSet (see page 6 this docu-
                            ment for more details on how to retrieve fundamental beta).
QUICK GUIDE: FINDING BETA                                                                                                   Page 5

                       Using Cutler Center Resources to Calculate Beta
                      Wharton Research Data Services
                       (NOTE: Available from Horn Library website from both on and off campus)

                       If you wish to have more control over how beta is calculated, you can download historical prices of a
                       security and desired index using the CRSP database in WRDS and then run a regression in Excel. This
                       method involves more work than simply looking up a beta, but allows you to eliminate any “black box”
                       calculation issues you may be worried about.

                      Download Data for a Stock:
                      Step 1: Access WRDS from Horn Library website. Once logged in, select the CRSP Database
                      (Center for Research in Security Prices). Next, select Daily Stocks from the links on the left.
                      Step 2: Select Date range and frequency
                                 Keep Frequency at Daily (for 1 year) or
                                 Monthly (for 5 years)

                      Step 3: Enter or Search for a company
                                 Make sure “Search by” is set to TICKER

                      Step 4: Select the variables you want returned such as:
                                 Company name
                                 Return: 3 options include:
                                       Holding period return (includes
                                       dividends and stock splits)
                                       Value-weighted return (includes
                                       Equal-weighted return (includes
                      Step 5: Select output
                                 Make sure “tab-delimited text” is selected

                      Step 6: Select Submit Request
                                 Another window will open while your request
                                 is processed. Once complete, you can click on
                                 the link to open the .txt file

                      Step 7: Import the .txt file
                                 Save the text file as a name that makes sense to you
                                 Open Excel and open the file and you will be prompted with the Text Import Wizard
                                 Be sure that “delimited” is selected on 1st screen and that “tab” is selected on 2nd screen
                                 On the third screen, select Date column and change the date format to YMD and click Finish
                                 Your data will be opened in Excel and should be resaved as an .xls file (rather than .txt)

                      Download Data for an Index:
                      To download returns for an index, select Indices and Deciles from the links on the left and follow the
                      same procedures as above to select the data and generate the output.

                      Calculate Beta:
                      Once you have downloaded returns data for both the stock and the index into Excel, you are you are
                      ready to calculate beta.

                      Use Excel to run a regression of the stock returns (dependent variable, y-axis) against the index returns
                      (independent variable, x-axis). The coefficient of the index return is the beta of the stock.
QUICK GUIDE: FINDING BETA                                                                                                       Page 6

                       What is Fundamental Beta?

                       Beta is the measurement of expected return between a stock and the market. Normally we assume that the
                       past is going to represent the future and therefore historical betas are calculated using only historical re-
                       turns volatility. This practice is widely used in calculating beta, often through a time-series regression
                       analysis comparing the stock’s return with the market’s return.

                       Conversely, a fundamental beta (also know as predicted beta) is derived from current and predicted fun-
                       damentals of the company. Different models incorporate various risk factors, such as company size,
                       volatility, momentum, and other value factors, in calculating a company’s fundamental beta. Northfield
                       recalculates the fundamental beta monthly, thereby taking into account any changes in the company’s
                       underlying risk structure during that time.

                       Should I use fundamental beta or historical beta in my analysis?
                       Professionals and academics alike argue that there are several problems with using historical betas.
                       Two major complaints of a historical beta are that it:

                                Does not factor in fundamental changes in a company’s operations. For example, selling off a
                                large portion of a struggling business can significantly change a company’s risk characteristics
                                and a historical beta would reflect this change only very slowly, over time. Whereas, a funda-
Northfield Portfolio            mental beta would account for this operational change right away.
Optimizer is                    Is influenced by one-time events that are unlikely to affect a company again, thereby artifi-
available on three              cially depressing or raising a company’s beta.

FactSet                The decision to use a historical or fundamental beta is up to the individual performing the analysis.
Workstations in the    However, many studies have demonstrated that fundamental betas significantly outperform historical
                       betas as predictors of future stock behavior.
Cutler Center: #13,
14, and 15.            (Reference: Barra Beta Books for Companies,

                       Finding Fundamental Beta Using Northfield (via FactSet):
                       (NOTE: FactSet is only available in the Cutler Center)

                       In addition to finding a historical beta through FactSet, you can retrieve fundamental betas from the
                       Northfield Portfolio Optimizer (accessed through FactSet).

                       Getting Started:
                       To retrieve fundamental betas calculated by Northfield for a list of equity securities, first create a tem-
                       plate in Excel that can be shared with FactSet to retrieve the betas. This template must contain proper
                       syntax and formulas in order for the FactSet servers to understand what data you are looking for.

                       Step 1: Make sure FactSet-Excel Link is established
                       To make sure that the FactSet-Excel Link is established, go to the Start Menu —> Programs —> Fact-
                       Set—>FactSet-Excel Link. This will open Excel and establish the connection to FactSet. You will not be
                       able to look up formulas or run the download without performing this step (even if you see the FactSet
                       toolbar in Excel).
QUICK GUIDE: FINDING BETA                                                                                                      Page 7

                      Finding fundamental beta using Northfield (continued):
                      Step 2: Create a FactSet template in Excel:

                      A template can be used to retrieve numerous types of data from FactSet. The template must contain two
                      things: company identifiers and data request codes.

                            The identifiers must be in Scientific form in order for FactSet to understand them (such as tickers,
                                SEDOL, CUSIP). If the identifiers are downloaded from FactSet, they will already be in Scien-
                                tific form. Otherwise, you must go to Format Cell—>Number and select Scientific.

                            The Data Request Codes specify what data you want to retrieve (such as price, P/E ratio, beta, net
                                income, etc.) All data request codes in FactSet start with a carrot (^).

                                 For example,
                                 ^=CA_SALES(2007) is
                                 the formula to retrieve
                                 Sales data for fiscal year
                                                                                                          FQL Formula

                                 Use FQL Formula Lookup (in the FactSet toolbar in Excel)
                                 to find formulas.

                                 You do NOT have to copy the Data Request Code into all
                                 rows, just the first row.

                                 All formatting must be set up in the template (colors, fonts,
                                 borders, headings, etc.).

                      Example FactSet Template


                                                                                                                   Data Request

                      Step 3: Download the betas from Northfield (via FactSet):

                      Within your Excel template, enter the Data Request Code to retrieve fundamental betas from Northfield:


                      Once the template is set up, with the list of identifiers and the formula for Northfield, you need to
                      download the data from Excel.

                            Select the Download button from the FactSet toolbar in Excel. This will establish communication
                            between your Excel template and the FactSet servers.
QUICK GUIDE: FINDING BETA                                                                                                       Page 8

                        Finding fundamental beta using Northfield (continued):

                        Example Template Before Data Download


                                                                                                Beta Formula

                        FactSet returns a second Excel file prefaced with the file name D, such as “D_filename.xls”. This file
                        contains the downloaded data.
TIP: Make sure the
FactSet-Excel link is   You can refresh the data at any time by using your template file, not the downloaded file. All changes to
established before      your file (including formatting) must be changed in the template file.
attempting to
download the data.      Template After Data Download


                        For more information:

                        Reference the FactSet Online Assistant: Online webinars can be found in Learning Tools —> Online
                        Learning under the list of tutorials called Spreadsheet Reports. There are four tutorials on the topic of
                        downloading data from FactSet.
                               The Stephen D. Cutler Investment Management Center provides Babson stu-
                               dents, faculty and alumni access to state-of-the-art information resources and
                               technology currently used by investment professionals in the market place. The
                               Cutler Center is home to the Babson College Fund (BCF) and reflects Babson’s
                               commitment to provide Babson students “real world” educational experience.
                               A sample of the market data services available include: Bloomberg, FactSet,
                               Thomson One Equity, Compustat, Northfield, Capital IQ and many others. For
                               more information about the Center’s programs and instructional offerings,
                               please contact the manager of the Cutler Center, Cynthia Robinson, at (781)
Stephen D. Cutler Investment
Management Center              239-5257.
Horn Library
Babson College
Cynthia Robinson, Manager
Phone: 781.239.5257

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