- 29 -
function of the relationship between the return on an individual
security and the return on the market as a whole. Pratt et al.,
supra at 166. Betas of public companies are frequently
published, or can be calculated based on price and earnings data.
Because the calculation of beta requires historical pricing data,
beta can not be calculated for stock in a closely held
corporation. The inability to calculate beta is a significant
shortcoming in the use of CAPM to value a closely held
corporation; this shortcoming is most accurately resolved by
using the betas of comparable public companies. Id. at 175.
Mr. Shelton's unsubstantiated statement regarding the standing of
BKC in the fast food industry is hardly a sufficient basis for
arriving at a beta of 1.0 for FIC. Mr. Shelton did not provide
any evidence that he had researched or calculated the betas of
BKC or any other public company. He seems to have assumed,
without further explanation, that FIC and BKC were comparable
10(...continued)
or market, risk represents the sensitivity of the future returns
from a given asset to the movements of the market as a whole.
Unsystematic, or unique, risk reflects those elements of risk
that are specific to the asset held, such as company
characteristics, industry conditions, and the type of investment
interest held. Capital market theory assumes that investors hold
or have the ability to hold, diversified portfolios that
eliminate, on a portfolio basis, the effects of unsystematic
risk. Consequently, since capital market theory assumes that an
investor holding a diversified portfolio will encounter only
systematic risk, the only type of risk for which an investor can
be compensated, is systematic risk, the degree of which can be
measured by beta. Brealey & Myers, Principles of Corporate
Finance 137-138, 143-144 (4th ed. 1991); Pratt et al., Valuing a
Business 166 (3d ed. 1996).
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