{"id":10533,"date":"2025-05-16T13:31:09","date_gmt":"2025-05-16T17:31:09","guid":{"rendered":"https:\/\/ecademydj.com\/?p=10533"},"modified":"2025-05-16T13:31:09","modified_gmt":"2025-05-16T17:31:09","slug":"a-coefficient-that-is-worth-200-billion-dollars","status":"publish","type":"post","link":"https:\/\/ecademydj.com\/en\/2025\/05\/16\/a-coefficient-that-is-worth-200-billion-dollars\/","title":{"rendered":"A coefficient that is worth 200 billion dollars!"},"content":{"rendered":"

By Dominique Jacquet<\/strong><\/h3>\n

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In a recent interview with CNBC, Lina Khan, former chair of the FTC (Federal Trade Commission<\/em>, in charge, among other things, of monitoring competition practices) talks about the trial that is opening for Meta and criticizes the acquisitions made by the company, Instagram (2012, $1bn) and WhatsApp (2017, $19bn).<\/p>\n

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She explains that the Facebook of the time, which became Meta, simply panicked when it observed the very rapid development of the activity of these two companies.<\/p>\n

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When Facebook went public (in a chaotic way…) in May 2012, we all discovered with interest the economic and financial metrics of this social network.<\/p>\n

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The stock market valuation will be based, as traditionally suggested by the discounted Free Cash Flow method, on profitable development prospects combined with investors’ expectations in the form of the discount rate for fund flows known as the WACC. This rate reflects the average return required by investors, shareholders and financial creditors, in proportion to their respective contributions to the financing of the activity.<\/p>\n

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Calculating Facebook’s WACC is a simplified exercise by the fact that the financial resources come from shareholders alone.<\/p>\n

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To estimate the return expected by the owners of the company, we use the model called CAPM which adds to the risk-free rate (the price of time) a risk premium calculated from the average risk premium of the equity market (about 6% for the US market) multiplied by a coefficient that reflects the relative risk of the firm in relation to the market.<\/p>\n

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It is this coefficient that is worth 200 billion…<\/p>\n

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The systematic risk coefficient, known as \u00df, reflects the sensitivity of the firm’s value to changing macroeconomic conditions. The company is not subject to this risk alone, but all the other risks that disrupt its activity disappear as if by magic by the insertion of the firm into a portfolio of securities (“modern” finance is called Portfolio Theory).<\/p>\n

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Measuring this coefficient involves an econometric calculation that correlates variations in the return of the security with variations in the return of the general index of the market on which the company is listed.<\/p>\n

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To estimate a correlation, one must decide the length of the observation period and the frequency of observations.<\/p>\n

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The following graph shows Meta’s “rolling” \u00df over 12- and 36-month periods with monthly observations.<\/p>\n

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Several observations:<\/p>\n