RE: Correct benchmark for beta
Yes, generally speaking, use the beta for the national market. But the key is match apples and apples - you must use the appropriate market risk premium to make the beta make sense! So for your Dutch company, use: 1) beta vs. Dutch national benchmark 2) the market risk premium of above benchma... Yes, generally speaking, use the beta for the national market.
But the key is match apples and apples - you must use the appropriate market risk premium to make the beta make sense!

So for your Dutch company, use:
1) beta vs. Dutch national benchmark
2) the market risk premium of above benchmark vs. risk-free rate

Why? Put in simple, short terms, you are trying to estimate the specific risk (as measured by discount rate, WACC) for that specific company, not your portfolio. At least that's the idea anyway.

Note: CAPM theory says risk-free rate is US Treasury, not local govt treasury. This is explained fully in our Finance 101 and valuation courses.

In the USA, S&P 500 for large caps, but the appropriate Mid- and Small Cap index for smaller firms, correct. Why trickier for Europe? Same concept as explained above! Large markets in Europe should be no problem. The Portuguese company however, is a different concept b/c if the top 5 weights represent 65% of the index, that's way too biased. Ask yourself - what are the alternative investment options for an investor if they don't invest in that Portuguese company or the PSI-20 Index? FTSE? Go to Spain? France? Pick that as the benchmark for beta then. Read More

stock trading
Here's a question that was posed to us: "in my financial markets class, we have a mock trading competition going on, and whomever wins at the end of the semester (70 or so days) will get a 10% increase in total points for the semester, which could potentially boost the grade up a letter. i, obviousl... Here's a question that was posed to us: "in my financial markets class, we have a mock trading competition going on, and whomever wins at the end of the semester (70 or so days) will get a 10% increase in total points for the semester, which could potentially boost the grade up a letter. i, obviously, really want to win; how do you suggest i go about this / what should i be looking at research-wise?"

our short answer:

If you aren't following the mkt each day, this is tough if not impossible to teach since your actions and selections now will affect the end portfolio value. In short, Identify the sectors that you think will outperform the market. Your goal isn't to maximize your profits but to beat the rest of the class. So considering what's going on now in the mkt, read up on interent, WSJ etc on what industries will do the best in this craphole of an economy. Then, within that sector, pick the best companies. The way to win is to totally pick specific stocks and not diversify. However the risks are obvious. If you don't pick the right stocks you really lose.

For instance, things to think about:
- traditionally in good times, small cap stocks do well as they usually play into niche areas. In bad times, small caps don't do well because no one is buying and they have less room for buffer since they don't have as much economies of scale
- clearly the banking sector is hurt right now. No one is immune but if you think there are a couple outliers, then pick them
- oil & gas: as oil prices go up, integrated oils like exxonmobil do well, refineries like valero don't. As oil goes up, airlines suufer. Opposite is true. So take a stance on oil prices. Read up on full implications and make a decision
- retailers - discounters like wmt do well now, as does costco. But then costco got hurt more than wmt since costco had less room to quickly raise prices whereas wmt is able to control prices more but costco has a lot of private label (kirkland) so when costs up, they couldn't pass along as quickly
- since you are now literally living thru history, and the bailout hasn't passed yet, ask, who will benefit most when it does pass? Make the bet
- think global economics and the balance of payments and interest rate parity. As the US needs to issue more debt in future for bailout and other reasons, the $ will likely continue to depreciate. So pick companies with lots of international exposure. However, its relative to europe and asia - if they suffer more than US, then dollar will appreciate, if not, then reverse
- you probably can't short else you can do lots of stuff. Pick the opposite and short them to magnify returns

Final assessment: research all the different trends and relationships. Identify what you believe will happen and go from there. This is what portfolio mgrs do and takes yrs to perfect. Welcome to finance. Read More

Re: does the idiosyncratic risk of the company change?
Tricky question. Since firm specific risk is defined as total risk (sigma or standard deviation) less market risk, as the total risk of individual stock changes and assuming market risk stays constant (since we only update market risk premium once a year when Ibbotson publishes their updated Marke... Tricky question.

Since firm specific risk is defined as total risk (sigma or standard deviation) less market risk, as the total risk of individual stock changes and assuming market risk stays constant (since we only update market risk premium once a year when Ibbotson publishes their updated Market Risk Premia report), then the idiosyncratic risk would in theory change.

However, generally speaking we don't care for idiosyncratic risk since it doesn't belong in a well diversified portfolio. This concept of CAPM and risk doesn't apply in an LBO context since the cost of capital of the equity sponsor (i.e. private equity firm) is not calculated using CAPM, but rather, the required return of private equity firms. Read More

Re: Break out depreciation from cost of goods sold or operating expenses
The challenge is that depreciation belongs in both COGS and SG&A, but the proper breakdown is not usually provided in public documents. If you have access to management accounts, then you'd be able do a deeper dive and get more granular.

Re: Multi currency model
If I have a Euro portfolio, USD porfolio and Local currency do I just make 3 balance sheet, Income statement and cash flow and then translate the foreign currency to presentation currency? and have my 4th consolidated statement?