Revisiting Total Beta: Round Two

Abstract

As of late, the business appraisal profession has been inundated with articles defending or rebutting Total Beta, and discussing various related aspects of capital market theory. . . . . Much of the discussion is convoluted and, alas, much misstates fundamental concepts and theory. There appear to be as many opinions regarding every aspect of modern portfolio theory and its application (or lack thereof) to privately-held companies as there are writers to opine. This paper will provide a review of the theory and calculations underlying several key propositions in finance that are fundamental to the ongoing Total Beta debate. These propositions also form the basis for meaningful resolution of that debate. This paper will not address all aspects of modern portfolio theory, the derivation of common ordinary Beta, or the Total Beta debate. It will also not address the problems of investor lack of diversification or quantifying company specific risk. These are for later papers. This paper will address certain propositions by Total Beta advocates, Peter Butler and Gary Schurman. These are found in “A Tale of Two Betas” (Butler & Schurman, Value Examiner. January-February 2011. pp. 21-26) and “Derivation of the Butler Pinkerton Model” (May 2010 whitepaper by Gary Schurman on his website).