Beta in WACC

Beta is a measure of the volatility of a company's stock price relative to the overall stock
market. It is used in the calculation of the cost of equity, which is a component of the
weighted average cost of capital (WACC). WACC is the overall cost of capital for a
company, which represents the required rate of return that investors expect to earn on
their investment.

In the capital asset pricing model (CAPM), which is a widely used method for estimating
the cost of equity, beta is used to measure the risk of a company's stock compared to
the market. A beta of 1 means that the stock's price is expected to move with the
market, while a beta greater than 1 means that the stock is more volatile than the
market, and a beta less than 1 means that the stock is less volatile than the market.

To calculate the cost of equity using the CAPM, you can use the following formula:

Cost of Equity = Risk-Free Rate + Beta * (Expected Return of the Market - Risk-Free
Rate)

Where:

 Risk-Free Rate is the return on a risk-free asset, such as a U.S. Treasury bond
 Beta is the measure of the stock's volatility relative to the market
 Expected Return of the Market is the expected return on the overall stock market