Question: Look again at Table 9.1. This time we will concentrate on Union Pacific. Beta Standard Error Canadian Pacific 1.21 0.27 CSX 1.35 0.29 Kansas City

Look again at Table 9.1. This time we will concentrate on Union Pacific.

	Beta	Standard Error
Canadian Pacific	1.21	0.27
CSX	1.35	0.29
Kansas City Southern	0.87	0.31
Genesee & Wyoming	1.80	0.31
Norfolk Southern	1.37	0.26
Union Pacific	0.90	0.22
Industry portfolio	1.25	0.21

Estimates of betas and standard errors for a sample of railroad companies and for an equally weighted portfolio of these companies, based on monthly returns from January 2013 to December 2017. The portfolio beta is more reliable than the betas of the individual companies. Note the lower standard error for the portfolio.

a. Calculate Union Pacifics cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.

b. Can you be confident that Union Pacifics true beta is not the industry average?

c. Under what circumstances might you advise Union Pacific to calculate its cost of equity based on its own beta estimate?

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