International Beta

What Is International Beta?

International beta (also known as "global beta") is a measure of the systematic risk or volatility of a stock or portfolio in relation to a global market, rather than a domestic market.

Key Takeaways

  • International beta qualifies the systematic risk of a stock or portfolio in relation to the global market of equities, and not a country-specific benchmark like the S&P 500.
  • International beta is especially relevant for companies with worldwide operations—whose stocks are influenced by international factors.
  • Global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index.

Understanding International Beta

The concept of international beta is particularly relevant in the case of large multinational companies with worldwide operations that have share prices more closely correlated with a global equity index than with the benchmark equity index in their country of domicile.

Investors can use the basic capital asset pricing model (CAPM) to determine the expected return on an asset based on its domestic beta and expected domestic market return. Similarly, the global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index, such as the Morgan Stanley World Index.

The term "international beta" in the context of finance or portfolio theory should not be confused with international beta testing, which refers to the testing of software products in international markets.

As noted above the global capital asset pricing model (CAPM) can help investors calculate expected returns on an asset, based on its international beta. The global CAPM extends the concept of the traditional capital asset pricing model (CAPM) by incorporating foreign exchange risks (generally with a foreign currency risk premium).

The global CAPM expands upon the traditional CAPM equation:

r a = r f + β a ( r m r f ) where: r f = risk free rate β a = beta of the security r ˉ m = expected market return \begin{aligned}&\overline{r_a}=r_f+\beta_a(\overline{r}_m-r_f)\\&\textbf{where:}\\&r_f=\text{risk free rate}\\&\beta_a=\text{beta of the security}\\&\bar{r}_m=\text{expected market return}\end{aligned} ra=rf+βa(rmrf)where:rf=risk free rateβa=beta of the securityrˉm=expected market return

In the international CAPM (ICAPM), in addition to getting compensated for the time value of money and the premium for deciding to take on market risk, investors are also rewarded for direct and indirect exposure to foreign currency. The ICAPM allows investors to account for the sensitivity to changes in foreign currency when investors hold an asset.

International Beta and the Morgan Stanley World Index

The Morgan Stanley Capital International All Country World Index Ex-U.S. (MSCI ACWI Ex-U.S.) can help investors who benchmark their U.S. and international stocks separately. The MSCI ACWE Ex-U.S. index provides a way to monitor international exposure apart from U.S. investments.

The top ten holdings of the MSCI ACWI Ex-U.S. as of Sept. 30, 2022, were as follows:

  • Taiwan Semiconductor Mfg.
  • Nestle
  • Roche Holding Genuss
  • Tencent Holdings (CN)
  • Shell
  • Samsung Electronics Co.
  • ASML Hldg.
  • Astrazeneca
  • Novo Nordisk B
  • Novartis

These holdings span China, Japan, United Kingdom, France, Canada among other nations. Country weights include: Japan (14.1%), China (9.2%), United Kingdom (9.7%), France (7.1%), Canada (8.3%) and Other (51.67%).

What Is Beta?

Beta measures a stock's price volatility against that of a domestic index. In the U.S., beta is measured against the S&P 500 (which has a beta of 1.00). A beta greater than one means that the stock tends to move faster than the broader market (either up moves or down moves). A beta lower than one instead means the share prices are relatively less volatile.

Why Use an International Beta?

Instead of referencing the S&P 500, the international beta sets a stock's price movements in relation to a worldwide index of stocks. Companies with global operations, or which rely a great deal on foreign exports, may have share prices that are better represented by such an index rather than S&P 500.

What Is International CAPM?

ICAPM is a way to calculate the relative risk/return profile of a security against a comprehensive basket of global equities. International CAPM extends beyond the traditional CAPM by compensating investors for foreign currency exposure. International beta is derived from the ICAPM model.

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  1. MSCI. "MSCI ACWI ex USA Index (USD)."

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