[Evan]

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Regression betas over many, many firms over long periods of time might give you average betas that are unbiased. That assumes a rational expectations environment where, on average, investors' expectations of future returns are true. That's a fairly strong assumption - even for a guy living in Famaland, Chicago, like I do.

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This is pretty much what a built up beta is.

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What I require for holding a stock and what the market will give me. If I were to hold only one individual stock in my portfolio, I would require an expected return greater than I would require for holding the index.

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Okay, but you wouldn't just be holding the one tock and you COULD diversify. The "true" cost of equity for that firm should assume diversification is possible. The one stock portfolio was just an example used to demonstrate what a cost of equity is, not a real life scenario.



I don't think your cost of debt analogy is correct. Cost of debt is an explicit rate (although not when there is no recently traded or issued debt) while cost of equity is largely implicit. The price:rate ratio doesn't really hold or equity. It doesn't really hold for debt either, which is why people often turn to things like interest coverage ratios to impute accurate discount rates for debt when no recent transactions are available. The quoted interest rates on debt can be VERY different from what the firm would have to pay if it were to issue debt in the present.

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By the way, have you ever been to a Berkshire Hathaway annual meeting? If not, you should go - it's a good time. You should also get a group of students (I think you're in school) to go visit Buffett in Omaha.

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Never been. You have to own a share to attend, correct? I've thought about buying a class B share just to go to the meeting, but I haven't done it yet. I am in school at NYU, so the group idea is a good one.