What is the right market index to use in estimating betas?
In most cases, analysts are faced with a mind boggling array of choices among indices when it comes to estimating betas. Some analysts use only the local index, but others are willing to experiment. One common practice is to use the index that is most appropriate for the investor who is looking at the stock. Thus, if the analysis is being done for a U.S. investor, the S&P 500 index is used. This is generally not appropriate. By this rationale, an investor who owns only two stocks should use an index composed of only those stocks to estimate betas. The right index to use in analysis should be determined by who the marginal investor in Aracruz is – a good indicator is to look at the largest holders of stock in the company and the markets where the trading volume is heaviest. If the marginal investor is, in fact, a Brazilian investor, it is reasonable to use a well-constructed Brazilian index. If the marginal investor is a global investor, a more relevant measure of risk may emerge by usi
