Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977



Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Using Past Information to Estimate Required Returns

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

Chapter 8 discussed the basic trade-off between risk and return In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we don’t have a crystal ball, we generally use historical data to estimate this relationship with beta.

As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites.

2. On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, h months—up to 10 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices (historical data). Some websites will not only show daily activity but also weekly or monthly activity. In addition, some websites will allow you to download the data into an Excel spreadsheet.


Summary Introduction

To explain: Change in Graph over different time period.

Stock Market:

Stock market is a secondary market, where all the companies are listed and the shares of the listed company are traded.


Changes that occur in graphare as follows:

  • Graph of S100 for 1 day is highly volatile, as line stock price is changing every second.
  • Graph of one month shows stock exchange falling in the end and highest in the middle.
  • When 3-month period is used, graph shows that stock exchange is recovering from a bad situation but after sometime it falls again but quickly starts recovering.
  • In 6-month period, stock exchange is recovering slowly but in the start of last quarter period it falls but start recovering quickly...

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