Question

To estimate a stock's beta from historical data, we should regress the (excess) return of the stock on the (excess) return of _____.

Answer 1

Answer: c. the market portfolio

Step-by-step explanation:

A stock's beta measures how the stock moves in relation to the general movement of the market. It is therefore possible to estimate it based on the returns of both the market and the historical return of the stock.

To do so, one can run a regression analysis of the excess return of the stock on the excess return of the market portfolio. This will allow for knowing the amount of risk that is from the market and the one from the stock itself thereby allowing for the calculation of the stock's beta.