# 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. 7. Assume that the risk-free rate is 4% and the market risk premium is 5%. What is the required return on the company's stock?

### Fundamentals of Financial Manageme...

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

### Fundamentals of Financial Manageme...

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

#### Solutions

Chapter
Section
Chapter 8, Problem 7TCL
Textbook Problem

## Expert Solution

### Want to see the full answer?

Check out a sample textbook solution.See solution

### Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Find more solutions based on key concepts
Show solutions
Define net exports and net capital outflow. Explain how they are related.

Principles of Macroeconomics (MindTap Course List)

How are inflation and unemployment related in the short run?

Brief Principles of Macroeconomics (MindTap Course List)

What is the purpose of a digital audit trial?

Accounting Information Systems

Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements wont...

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

Explain the advantage of establishing a tax calendar.

College Accounting (Book Only): A Career Approach