CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

The beta for stock X can be estimated using regression techniques. Data required for this analysis include ______.

I. historical rates of return for X and M
II. the risk-free rate (the rate of return on T-bills)
III. historical rates of return for other assets contained in M
Correct Answer: I

User Contributed Comments 9

User Comment
chenyx R=Rf+(Rm-Rf)*beta just as y=a+(x-a)*b
If know x,y,we can regression b
Khadria To calculate Beta, we don't need Rf. So II is not correct. Rf is required to calculare E(R) of a stock but not for Beta.
lawrence yes you do need Rf since you would regress (Stock return - Rf) vs (market return - Rf).
DannyZhou Statistically, regression (stock return -Rf) vs (market return -Rf) gives the exactly same coefficient (different intercept) from regressing stock return vs. market return.

Thus, II is wrong because we only need beta (the coefficient in the regression).
JDM74 Good trick question. Have to read these word for word.
DariSH The slope of SML is market risk premium, so we need only E(M) and E(X) to define beta.
johntan1979 Don't forget the equation

beta = covariance i,M / covariance M,M

= rho x sigma i/sigma M

Risk-free rate is no required to compute beta
Shaan23 You guys are all not following. It's not in the AN notes.

For Beta estimation using regression the market model is Ri = alpha + BRm + error component

Ri and Rm are historical rates in the equation. Not a trick question or anything. Just that formula
pigletin you can calculate beta using slope function in Excel?only historical returns needed
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