How do you calculate equity beta from a regression analysis?

To calculate equity beta from a regression analysis, the method involves performing a regression of stock return versus market return. This approach entails running a statistical regression where the dependent variable is the return on the stock, while the independent variable is the return on the overall market. The resulting slope of the line that best fits the data points represents the equity beta.

The equity beta reflects the sensitivity of a company’s stock returns in relation to market returns, providing an understanding of how much the stock is expected to move in response to moves in the market. A beta greater than one indicates that the stock is more volatile than the market, while a beta less than one indicates less volatility.

The other options do not correctly describe the process of calculating equity beta. For instance, calculating the average return of the investment does not account for the relationship between the stock and market returns, which is essential for determining beta. Averaging the company’s cash flows also does not provide relevant information about stock volatility relative to the market. Similarly, taking the difference between market rates and stock rates does not analyze the proportional relationship needed for beta calculation.