Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
portfolio, or Beta, is illustrated in Exhibit 2.7.
Exhibit 2.7: Security market line
Security Market Line
Return
R M
Beta = 1
Beta is defined in terms of covariance with the market. Stocks with a higher than
average covariance with the market are high Beta, and stocks with a lower than
average covariance with the market are low Beta. It is important to understand
that CAPM does not imply that all that drives share prices is equity market
movements. What CAPM does is to assume that shares are driven by market
movements and by stock specific factors, but that it is only their exposure to the
former that determines their risk as part of an investor portfolio. Exhibit 2.8
illustrates the point.
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