Why might it be useful to estimate the beta for a stock from returns on stocks within its industry rather than from the stock itself?
What will be an ideal response?
Estimating a beta using a regression is often imprecise because a firm's returns exhibit considerable idiosyncratic volatility. That is, much of the variation in a firm's return is driven by firm-specific events. This idiosyncratic volatility reduces the fit of the regression and increases the standard errors of the estimates. If firms in the same industry have about the same systematic risk, which is a reasonable assumption, their betas will be about the same as well. A portfolio of firms diversifies away a lot of idiosyncratic risk and is consequently much less variable than an individual firm's stock returns. Therefore, beta estimates from industry portfolios are more precise, and provide reasonable estimates for a firm's beta.
You might also like to view...
The contribution of equipment by a stockholder in exchange for common stock is an example of ________.
A) investing activity B) financing activity C) operating activity D) non-cash investing and financing activity
Technicorp Electronics, a chain of stores selling electronics in the north-east region of the United States, is interested in determining whether it is paying its sales representatives an appropriate salary. It has decided to conduct a survey across all
the electronics stores in the north-east region of the United States to determine how well they are paying their employees. Limit and define the scope of the issues by answering the five Ws and writing a statement of purpose.
What are the requirements of the Statute of Wills?
What will be an ideal response?
In a centralized organizational structure, the ________ department is responsible for developing promotional plans that will be approved by management and recommending a promotions program based on the overall marketing plan, objectives, and budget.
A. product planning B. production C. finance D. auditing E. advertising