After reviewing Figure 6-5, explain the difference between the plotted dots and the firm’s characteristic line. What must be done to eliminate the variations?

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FIGURE 6-5 Monthly Holding-Period Returns, eBay versus the S&P 500 Index, June 2014 through May 2015 eBay Returns (%) 20 -20 -15 -10 -5 15 10 Sn .-5 -10 -15 -20 November 2014 returns 5 10 Run = 10% Slope = Rise/Run = 7.82%/10% = 0.782 characteristic line Rise = 7.82% 15 S&P 500 monthly returns (%) 20 Calculating beta: Visual the slope of a straight line can be estimated visually by drawing a straight line that best "fits" the scatter of eBay's stock returns and those of the market index. The beta coefficient then is the "rise over the run." For example, when the S&P 500 Index is 10 percent, shown on the horizontal axis (the run), eBay shown on the vertical axis (the rise) is 7.82%. Thus, beta is the rise divided by the run, or 7.82% = 10%. Financial calculator-financial calculators have built in functions for computing the beta coefficient. However, since the procedure varies from one calculator to another, we do not present it here. Excel-Excel's Slope function can be used to calculate the slope, slope(return values for eBay, return values for S&P).