Principles of Corporate Finance_ 12th Edition

226 Part Two Risk

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◗ FIGURE 9.2 We have used past returns to estimate the betas of three stocks for the periods November

2004 to October 2009 (left-hand diagrams) and November 2009 to October 2014 (right-hand diagrams). Beta is

the slope of the fitted line. Notice that in both periods Dow Chemical had the highest beta and Campbell Soup the

lowest. Standard errors are in parentheses below the betas. The standard error shows the range of possible error

in the beta estimate. We also report the proportion of total risk that is due to market movements (R^2 ).

β = 2.34

(0.34) 

R 2 = 0.44

Dow return, %

10

0

-10

-20

-30

20

30

40

-30- 20 -100 10 20 30 40 -30- 20 -100 10 20 30 40

-30- 20 -100 10 20 30 40

10

0

-10

-20

-30

20

30

40

30

40

β = 1.65

(0.17)

R 2 = 0.60

Dow return, %

Microsoft return, %

10

0

-10

-20

-30

20

30

40

-30- 20 -100 10 20 30 40

-30- 20 -100 10 20 30 40

β = 0.95

(0.17)

R^2 = 0.35

Microsoft return, %

β = 0.98

R (0.16)

(^2) = 0.37
10
0
-10
-20
-30
20
Market return, %
Market return, % Market return, %
Market return, %
November 2004–
October 2009
November 2009–
October 2014
November 2009–
October 2014
November 2004–
October 2009
Market return, %
Campbell Soup return, %
November 2004–
October 2009
β = 0.35
R (0.13)
(^2) = 0.10
10
0
-10
-20
-30
20
30
40
Market return, %
November 2009–
October 2014
Campbell Soup return, %
β = 0.39
(0.16)
R^2 = 0.08
30
40
10
0
-10
-20
-30
20
-30- 20 -100 10 20 30 40