What If Your Beta Is Lying to You?

📉 Introduction: The Beta Paradox

Picture this: You’ve spent hours gathering stock data, running regression analyses, and plotting scatter plots. Beta, the cornerstone of modern risk analysis, is supposed to help you understand how a stock reacts to market movements.

Then it happens.

You run a 5-year regression beta on Almarai, one of Saudi Arabia’s largest food companies—and it comes out negative.

Negative? That can’t be right—can it?

This wasn’t a bug. It wasn’t a joke. It was a wake-up call that regression beta, while popular, can fail spectacularly under the wrong conditions.

📊 Why Regression Beta Isn’t Always Reliable

Regression beta is a great starting point—especially in deep, liquid markets. It tells you how much a stock moves relative to the market using the formula:

β = Covariance (Stock, Market) / Variance (Market)

But it assumes one critical thing: clean and consistent market data.

Where It Breaks:

• Noisy price signals
• Thin trading volumes
• Inherently low-volatility stocks
• Local market anomalies (e.g., Saudi market)

That’s what happened with Almarai. The stock’s low volatility, combined with irregular trading activity, led to a misleading negative beta—completely contradicting its actual business profile.

🧠 How Smart Firms Tackle It: The Bottom-Up Beta Advantage

The best firms—investment banks, PE teams, and valuation pros—know better than to rely on regression alone. They use Bottom-Up Beta, which is:

🔍 Constructed from industry fundamentals, not just past stock data.

Here’s what makes it powerful:

✅ Peer-Based Construction

You build beta from a set of comparable global firms in the same industry—like dairy processors for Almarai.

✅ Removes Leverage

Strip out the effect of debt to isolate pure business risk.

✅ Re-Lever for Realism

Re-lever the unlevered beta to match Almarai’s capital structure = precise risk reflection.

✅ Works Without Market Data

Perfect for private companies, IPOs, or thinly traded stocks.

🧾 Real Insights from Almarai

Using the Bottom-Up Beta approach for Almarai revealed:

• A lower-risk business model than the regression beta suggested
• Stability aligned with its consumer staple nature
• Accuracy in Saudi-specific context (e.g., no tax shield, IFRS 16 lease treatment)

By using comparable listed dairy firms, adjusting for Saudi market nuances, and applying the right leverage adjustments, I produced a robust and realistic beta for valuation.

💡 Key Takeaway: Trust, But Verify

Regression beta? Good start.

Bottom-Up Beta? Real insight.

If you’re working on valuations, M&A models, project risk assessments, or fund-raising scenarios—especially in emerging markets—Bottom-Up Beta is your best friend.

📌 Bottom line: Always verify regression beta. If something feels off, it probably is.

📥 Want the Full Excel Model?

Get the full Almarai case study including:

✅ Regression Beta (with scatter plot)
✅ Bottom-Up Beta calculations
✅ Saudi-specific lease + capital structure adjustments
✅ Damodaran-inspired modeling flow

👉 Comment “beta” below or [Subscribe to FalconWise Newsletter] to get it directly.

🙌 Final Word

If this case study helped clarify beta for you, help spread the insight.

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💬 Comment with your thoughts or beta experiences.
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