Total beta and company-specific risk
Total Beta measures the total risk of a stand-alone listed company and so can be used to calculate the ever elusive company-specific risk premium.
A regular market beta measures only the additional risk, the systematic risk, the company adds to an already diversified portfolio. Total Beta measures both systematic and unsystematic risk.
On the assumption that an investor in a private business is unable to diversify away unsystematic risk, then unsystematic risk (company-specific risk) needs to be incorporated into the CAPM when valuing a private company.
Total Beta is a concept developed by Professor Damadoran, and the Professor kindly shares Total Beta’s by US sector here: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/totalbeta.html .
Peter Butler and Keith Pinkerton published an initial article in 2006, explaining how Total Beta can be used to quantify company-specific risk and that article is attached. It seems quite sensible to me! If the regression analysis is unreliable total beta is also unreliable, but that logic also applies to market beta.
A host of articles relating to the Butler and Pinkerton model (both supporting and criticisms) can be found at the ever helpful BVR website here: https://data.bvresources.com/defaulttextonly.asp?f=bpmarticles.
Simon is a CA Accredited Business Valuation expert, Chartered Accountant and a Certified Fraud Examiner. Simon specialises in providing valuation services. Before founding Lotus Amity, he was a Corporate Finance and Forensic Accounting partner with BDO Australia. Simon provides valuation services in disputes, for raising finance, for restructuring, transactions and for tax purposes.
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