A third approach is to estimate the market risk parameters from accounting earnings rather than from traded prices. Thus, changes in earnings at a division or a firm, on a quarterly or annual basis, can be related to changes in earnings for the market, in the same periods, to arrive at an estimate of an accounting beta to use in the CAPM.

While the approach has some intuitive appeal, it suffers from three potential pitfalls.
First, accounting earnings tend to be smoothed out relative to the underlying value of the company, as accountants spread expenses and income over multiple periods. This results in betas that are biased down, especially for risky firms, or biased up, for safer firms. In other words, betas are likely to be closer to 1.00 for all firms using accounting data.
Second, accounting earnings can be influenced by non-operating factors, such as changes in depreciation or inventory methods and by allocations of corporate expenses at the divisional level.
Finally, accounting earnings are measured, at most, once every quarter and often only once every year, resulting in regressions with few observations and not much explanatory power (low R-squared, high standard errors).

Having operated in the defence business for decades, Boeing has a record of its profitability. These profits are reported in the following table, together with earnings changes for companies in the S&P 500 going back to 1980. Table 8.4: Earnings on Defence Business - Boeing

Year	S& P 500	Boeing Defence Business
1980	-2.10%	-12.70%
1981	-6.70%	-35.56%
1982	-45.50%	27.59%
1983	37.00%	159.36%
1984	41.80%	13.11%
1985	-11.80%	-26.81%
1986	7.00%	-16.83%
1987	41.50%	20.24%
1988	41.80%	18.81%
1989	2.60%	-29.70%
1990	-18.00%	-40.00%
1991	-47.40%	-35.00%
1992	64.50%	10.00%
1993	20.00%	-7.00%
1994	25.30%	11.00%

Regressing the changes in profits in the defence division against changes in profits for the S&P 500 yields the following:

Based upon this regression, the beta for the defence division is 0.65. We can now estimate the cost of equity for the defence division, with a riskless rate of 5% and a risk premium of 5.5%, as follows.

Cost of Equity for the Defence Division = 5% + 0.65 (5.5%) = 8.58%