Risk and Return – Finance
III. Risk and Return
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To understand the risk profile of the company, estimate risk parameters and the hurdle
rates for the firm, try answering the following questions:
1.
Estimati
ng Historical Risk Parameters (Top Down Betas)
Run a regression of returns on your firm's stock against returns on a market index, preferably
using monthly data and 5 years of observations (or)
If you have access to Bloomberg, go into the beta calculat
ion page and print off the page (after
setting return intervals to monthly and using 5 years of data)
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What is the intercept of the regression? What does it tell you about the performance of
this company's stock during the period of the regression?
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What
is the slope of the regression?
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What does it tell you about the risk of the stock?
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How precise is this estimate of risk? (Provide a range for the estimate.)
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What portion of this firm's risk can be attributed to market factors? What portion to
firm
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specific factors? Why is this important?
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