Apex, Inc. is a small high tech firm whose stock trades on the NASDAQ. You want

Question

Apex, 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 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, index of the 500 largest firms traded on the NYSE

Nasdaq Market Index, because Apex is a small firm.

an industry index of high tech firms.

Wiltshire 5000 Index, a total market index.

SP 500 Index, index of the 500 largest firms traded on the NYSE

Nasdaq Market Index, because Apex is a small firm.

an industry index of high tech firms.

Explanation / Answer

Apex is a small high tech firm so when we speak about capturing the Beta for calculating the CAPM option (A), Wiltshire 5000 index is not considered since it excludes small cap companies along with penny stocks (inspite of readily listing all public companies in US). S&P 500 which is the Option (B) comprises mainly the large cap stocks of US so being a small high tech firm Apex will not be listed there hence Option (B) cannot be considered. In case of Option (C) Nasdaq Market Index do considers stocks of small caps and at the same time the composition of the index is heavily tilted towards the information technological companies so Apex is a perfect fit in it. So its option (C) which should be considered among the relevant options that are provided.

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