Alleged Best Practices to Whom? Peter J. Butler, CFA, ASA, MBA, founder of Valtrend, LLC and inventor of the Total Cost of Equity Calculator (TCOE), responds to comments made by Robert Reilly and Connor Thurman regarding best practices used to arrive at the company specific risk; the latter article did not discuss the TCOE and here he “key[s] in on Part III—the section which addresses empirical evidence in the selection of the company specific risk premium (CSRP)” and merits of the TCOE. Introduction I read all four parts of the “Best Practices for Estimating the Company-Specific Risk Premium” in NACVA’s…
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Unsystematic Risk Premia in Privately Held Companies How does a valuation professional quantify and defend the unsystematic risk premia (URP)? Is the latter a factor that helps explain why CAPM is less frequently used valuing a privately held company? As for Total Beta, is that any better than the use of Beta? In this article, the author suggests if one accepts that imperfect diversification (ID) explains the risk premia, he suspects that the risk level is a function of the buyer pool or market participant pool and that characteristic will validate whether the base URP should be adjusted up or…
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The Definition of Risk is Standard Deviation of Returns; Here’s What it Means, and What it Has to Do with “Total Beta” Is the Capital Asset Pricing Model (CAPM) superior as a valuation modeling tool to Total Beta? Peter J. Butler and Gary Schurman think not. Here’s why: