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.

4. Select one of the four stocks listed in question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and compare the stock's performance to the S&P 500's performance on the graph by adding the S&P 500 to the interactive chart. Has the stock outperformed or underperformed the overall market during this time period?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

Probability and Statistics for Engineering and the Sciences

ECON: MICRO4 (New, Engaging Titles from 4LTR Press)

Accounting

ECON MICRO

Financial & Managerial Accounting

Cornerstones of Financial Accounting

Corporate Financial Accounting

Principles of Economics (MindTap Course List)

Principles of Macroeconomics (MindTap Course List)

Principles of Microeconomics (MindTap Course List)

Brief Principles of Macroeconomics (MindTap Course List)

Accounting Information Systems

Foundations of Business (MindTap Course List)

STATISTICS F/BUSINESS+ECONOMICS-TEXT

Essentials of Business Communication (MindTap Course List)

Financial And Managerial Accounting

ECON MACRO

Essentials of Economics (MindTap Course List)

College Accounting, Chapters 1-27

Management, Loose-Leaf Version

Financial Accounting

College Accounting (Book Only): A Career Approach

Intermediate Accounting: Reporting And Analysis

MKTG 12:STUDENT ED.-TEXT

Managerial Accounting: The Cornerstone of Business Decision-Making

Accounting Information Systems

Economics:

Contemporary Marketing

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

College Accounting (Book Only): A Career Approach

Accounting (Text Only)

Statistics for Business & Economics, Revised (MindTap Course List)

Financial Accounting

Financial & Managerial Accounting

Exploring Economics

Pkg Acc Infor Systems MS VISIO CD

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

Principles of Macroeconomics (MindTap Course List)

Practical Management Science

Purchasing and Supply Chain Management

Survey of Accounting (Accounting I)

PAYROLL ACCT.,2019 ED.(LL)-TEXT

Economics (MindTap Course List)

Microeconomics

Corporate Financial Accounting

Bcom

Cornerstones of Cost Management (Cornerstones Series)

Economics For Today

Macroeconomics