Asked by Tyler Bergh on Jul 13, 2024
Verified
The ____ method consists of regressing historical values of a division's return on equity against the return on a major stock market index.
A) accounting beta model
B) CAPM
C) overlay
D) pure play
Accounting Beta Model
A method used in finance to estimate the beta of a company's stock based on its accounting ratios, as opposed to market-based measures.
Return on Equity
A measure of a corporation's profitability, calculated by dividing net income by shareholder equity, indicating how effectively company management is using investments to generate earnings growth.
Stock Market Index
A statistical measure that shows changes in the stock market by tracking a selected set of stocks to represent a particular market or sector.
- Recognize the significance of portfolio theory and assorted risk adjustment strategies in the context of capital budgeting.
Verified Answer
CB
Collin BaileyJul 15, 2024
Final Answer :
A
Explanation :
The accounting beta model involves regressing a division's historical return on equity against the return on a major stock market index to estimate the division's beta, rather than using market betas directly. This method is particularly useful for divisions of a company that are not publicly traded and therefore do not have a directly observable market beta.
Learning Objectives
- Recognize the significance of portfolio theory and assorted risk adjustment strategies in the context of capital budgeting.