USING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was 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 CAPM to estimate required we would like to know how the stock will move with the market in the future; but because we don't have a crystal ball, we generally use historical data to estimate this relationship with beta. returns As mentioned in Web Appendix 8A, 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 rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicdy 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 Internet websiters DISCUSSION QUESTIONS 1. Begin by looking at the historical performance of the overall stock market. Typicaly, on most of the financial websites you can enter S&P 500 and go right to the index's summary page. You will see a quick summary of the market's performance over the past 24 hours and 12 months. How has the market performed over the past year? 2On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices Some websites will not only show daily activity but also weekly or monthly activity. In addition some websites will allow you to download the data into an Excel spreadsheet