h. Suppose an investor wants to include some Bartman Industries stock in his portfolio.

Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio’s required return if it consists of 25% Bartman, 15% Stock A, 40% Stock B, and 20% Stock C.

THOMSON ONE Business School Edition Problem Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.

USING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS In the Capital Asset Pricing Model (CAPM) discussion, beta is identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the Bartman Industries Reynolds Incorporated Market Index Year Stock Price Dividend Stock Price Dividend Includes Dividends 2010 $17.25 $1.15 $48.75 $3.00 11,663.98 2009 14.75 1.06 52.30 2.90 8,785.70 2008 16.50 1.00 48.75 2.75 8,679.98 2007 10.75 0.95 57.25 2.50 6,434.03 2006 11.37 0.90 60.00 2.25 5,602.28 2005 7.62 0.85 55.75 2.00 4,705.97 resource Chapter 6: Risk, Return, and the Capital Asset Pricing Model 261 CAPM to estimate required returns, we would ideally like to know how the stock will move with the market in the future, but since we don’t have a crystal ball we generally use historical data to estimate this relationship.

As noted in the chapter, beta can be estimated by regressing the individual stock’s returns against the returns of the overall market. As an alternative to running our own regressions, we can instead rely on reported betas from a variety of sources. These published sources make it easy to obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various published sources. Indeed, Thomson ONE reports multiple beta estimates. These multiple estimates reflect the fact that Thomson ONE puts together data from a variety of different sources.

Thomson ONE—BSE Discussion Questions