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Unformatted text preview: with market
variance of market V im
Vm In practise the beta on a stock can be estimated by fitting a line to a plot of the return to
the stock against the market return. The standard approach is to plot monthly returns
for the stock against the market over a 60-month period.
stock, % Slope = 1.14
R2 = 0.084 Return on
market, % Intuitively, beta measures the average change to the stock price when the market rises
with an extra percent. Thus, beta is the slope on the fitted line, which takes the value
1.14 in the example above. A beta of 1.14 means that the stock amplifies the
movements in the stock market, since the stock price will increase with 1.14% when
the market rise an extra 1%. In addition it is worth noticing that r-square is equal to
8.4%, which means that only 8.4% of the variation in the stock price is related to
market risk. Download free ebooks at bookboon.com
32 Corporate Finance Risk, return and opportunity cost of capital 5.4 Portfolio risk and return
The expected return on a portfolio of stocks is a weighted average of the expected returns on the
individual stocks. Thus, the expected return on a portfolio consisting...
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- Spring '12