In computing the cost of equity for a firm,which of the following are recommended steps in estimating the CAPM beta using regression analysis?
I.Use a sample size equal to or greater than 60.
II.Use daily returns.
III.Use a diversified value-weighted index.
IV.Watch for possible distortions from market bubbles.

Question

Quizplus · Accepted Answer

Using a sample size equal to or greater than 60 is recommended to ensure statistical significance. Using a diversified value-weighted index helps to capture the overall market risk. Also, it is important to watch for possible distortions from market bubbles, as these can skew the results of the regression analysis. However, using daily returns may not always be appropriate, depending on the frequency of the data available and the specific characteristics of the firm's industry. Therefore, option II is not recommended in all situations.

In Computing the Cost of Equity for a Firm,which of the Following