Question

Show how to estimate beta using regression analysis.

Answer 1

To estimate Beta using regression analysis,

The stock returns are regressed against the market returns and the slope of the underlying regression equation is the Beta. A Beta of certain value indicates that for every 1 unit change in market return, the stock return changes by beta amount.

For example if the stock return and market return are the following,

Then regressing the stock returns against market returns will give the following output

Here, the coefficient of X variable ie 1.011 is the Beta, this means that for every 1 unit change in market returns, the stock returns change by 1.011 units.