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Finance allah shmoop What is beta it's Volatility That's it

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here's a stock chart reflecting the performance of a highly

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volatile stock plus size manikins ink and here's A teen

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t stock chart The last twenty years Yeah Whole lot

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less volatile Eighteen t stock has left beta then p

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s m so here's p s m mapped over the

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s and p five hundred Gopi sm is about twice

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a cz volatile Is the market here like on days

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The markets up one percent p s m is up

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two percent on days The markets down four percent p

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s m is crushed down eight percent So you'd say

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it has a beta relative to the s and p

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five hundred of two point Oh or two acts So

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the hammer this home let's do advanced math here So

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if any given day the marks up one point two

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percent has bit of two point Oh you'd expect p

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s m to be up two point four percent and

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same deal on the downside Yeah All right So what

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gives a company high beta Well simply put uncertainty Some

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companies have products in the pipeline Where the broader market

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has a lack of certainty that buyers by the millions

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anyway will want that product sort of the opposite of

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coca cola Like what are the odds that buyers will

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still want diet coke next year Yeah pretty good odds

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but plastic manikins modeling extra large kimonos away Less certainty

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So the company may end up awesome and ruling the

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world Or it may end up being melted down for

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spare parts Yeah Making newsman drone helicopter thing right Well

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what else creates beta Well leverage or debt Some companies

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have tons of cash Others have tons of debt of

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company a is trading for one hundred bucks a share

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and it has no debt and ninety five dollars a

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share in cash Will The market is valuing the operations

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of that company and only five bucks a share So

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the operations could do awesome Or they could do terrible

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and nobody's going to care Big web stock goes to

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one hundred hundred five Ninety five Something like that big

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No big deal So yeah i think about that The

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value The operations could increase one hundred percent and be

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worth five dollars more than the company's worth one hundred

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Five bucks No big deal All right but what about

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company b It has one hundred million box in ibadan

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or cash flow or cash earnings and five hundred million

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dollars in debt Well it trade today at eight times

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ebitda calculated as eight times that hundred million figure Then

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subtracting the five hundred million dollars in debt Well the

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company would be valued at three hundred million dollars That

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would be its market cap But what if it's new

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product is likely to be loved and people get excited

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about it and its operation suddenly get valued at twelve

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times even thought instead of just eight While the math

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goes like twelve times than one hundred million in cash

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flow for one point two billion then you subtract the

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five hundred million dollars in debt And that gets you

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a market value for the whole company of seven hundred

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million dollars So think about it The multiple of even

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da being paid by investors went up just fifty percent

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from eight to twelve But the stock market value of

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this company went up well over one hundred per cent

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In fact one hundred thirty three percent Why so much

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More volatile or so much more beta Yeah leveraged debt

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gasoline on the fire It can be great but when

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things go the other way it can leave you feeling 00:03:10.49 --> [endTime] you know like a dummy

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