Pottstown Control Systems, Inc. is a small high tech firm whose stock trades on
ID: 1171320 • Letter: P
Question
Pottstown Control Systems, Inc. is a small high tech firm whose stock trades on the NASDAQ. You want to estimate the stock's beta based on the empirical market line. That requires regressing the stock's returns against the contemporaneous returns on a market index. You will use the beta to estimate the stocks required return using the Capital Asset Pricing Model (CAPM). Which of the following would be your best choice for a market index in the regression?
.
Wiltshire 5000 index, a total market index.
SP 500 index of the 500 largest firms traded on the NYSE.
Nasdaq Market Index because Pottstown is a small firm.
An industry index of high tech firms.
......................... Standard Deviation ........ Beta
Security X .............. 0.35 ........................ 1.06
Security Y .............. 0.28 ........................ 1.45
Security Z .............. 0.44 ......................... 1.22
A.Wiltshire 5000 index, a total market index.
B.SP 500 index of the 500 largest firms traded on the NYSE.
C.Nasdaq Market Index because Pottstown is a small firm.
D.An industry index of high tech firms.
Explanation / Answer
Since the company is small it is better to use an index comprised of small firms
Nasdaq Market Index because Pottstown is a small firm.
Nasdaq Market Index because Pottstown is a small firm.
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