1. 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?
A. Wiltshire 5000 Index, a total market index.
B. SP 500 Index, index of the 500 largest firms traded on the NYSE
C. Nasdaq Market Index, because Apex is a small firm.
D. an industry index of high tech firms.
2. The beta of a firm is likely to be higher under what two conditions?
A. High cyclical business activity and low financial leverage.
B. Low cyclical business activity and high financial leverage.
C. High cyclical business activity and high financial leverage.
D. Low cyclical business activity and low financial leverage.