The standard approach is to plot monthly returns for

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Unformatted text preview: with market variance of market V im 2 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. Return on 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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