Beta is a common measure of stock-market risk or volatility. It is typically estimated as the slope coefficient for a simple regression model in which stock returns over time are the dependent Y variable, and market index returns over time are the independent X variable. A beta of 1 indicates that a given stock€™s price moves exactly in step with the overall market. For example, if the market went up 20 percent, the stock price would be expected to rise 20 percent. If the overall market fell 10 percent, the stock price would also be expected to fall 10 percent. If beta is less than 1, stock price volatility is expected to be less than the overall market; if beta is more than 1, stock price volatility is expected to be more than the overall market. In some instances, negative beta stocks are observed. This means that stock prices for such firms move in an opposite direction to the overall market. All such relationships are often measured using monthly data for extended periods of time, sometimes as long as 5 years, and seldom hold true on a daily or weekly basis.

Savvy investors need to be aware of stock-price volatility. Long-term investors often seek out high-beta stocks to gain added benefit from the long-term upward drift in stock prices that stems from economic growth. When a short-term dip in stock prices (bear market) is expected, investors may wish to avoid high-beta stocks to protect themselves from a market downturn. The table below shows estimation results for a multiple regression model that relates beta to seven fundamental determinants of stock-price volatility. Market capitalization reflects the market value of the firm€™s common stock, and is a measure of firm size. The P/E ratio is the firm€™s stock price divided by earnings per share for the current 12-month period. It shows how much current investors are willing to pay for each dollar of earnings. The current ratio is the sum of current assets divided by the sum of current liabilities, and is a traditional indicator of financial soundness. Dividend yield is common dividends declared per share expressed as a percentage of the average annual price of the stock. Projected sales growth is the projected gain in company revenues over the next 3-5 years. Finally, institutional holdings are the percentage of a company€™s stock that is owned by institutions, such as mutual funds, investment companies, pension funds, etc.

A. How would you interpret the finding for each individual coefficient estimate?

B. How would you interpret findings for the overall regression model?

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Dependent Variable: Beta (n= 1,050) Coefficient Estimate Standard Error (3) Independent Variables (1) t statistic (4) = (2)/(3) 26.96 3.87 2.96 6.41 -12.91 6.27 3.04 (2) Constant Market Capitalization P/E Ratio Current Ratio Dividend Yield Projected Sales Growth Rate Institutional Holdings ( percent) 8.380E-01 3.108E-02 1.128E-06 2.911E-07 1.315E-04 4.449E-05 2.083E-02 3.251E-03 -6.477E-02 5.016E-03 7.756E-03 1.237E-03 1.195E-03 3.939E-04 R = 30.2 percent SEE = .2708 F statistic = 81.275 Note: In scientific notation, 8.380E-01 is equivalent to 0.8380. Data Source: http://www.valueline.com.