**Weekly Puzzle #5: The Magic of Beta**

*The Set up*

In most finance text books, you are told that all you need to do to estimate the beta for a stock is to run a regression of returns on the stock against returns on the market index. The slope of the line is, of course, the beta. This avoids many key questions including:

- Over what period should the regression be run, and with what return intervals?
- What market index should you use for the regression?
- What exactly is the regresssion telling you about the beta for the stock?
- What is the beta telling you about the risk in your stock?

In this weekly puzzle, I have taken one company, GameStop, and estimated its beta against three different indices and you will have to make your judgment, based on these betas.

**GameStop's Beta**

**Against the S&P 500**

*Questions/
discussion issues
*

- For GameStop, list out the key regression statistics (alpha, beta and R squared) in the regression. Do you notice any patterns? Can you explain them?
- If you are analyzing GameStop and were required to use this regression betas, would you? If not, why not? What would you use instead?
- During the period of the regression, GameStop had incredible volatility but its beta does not seem to reflect it. Explain why.