So I'm getting into investing and practicing building some simple financial models for firms.
I'm looking at some FTSE listed companies (as I'm London based) and I'm trying to estimate a relevant cost of equity from scratch. What I'm wondering are:
1) Should I use the FTSE100, FTSE 250 or FTSE all share indexes as my proxies for the overall market? I guess the All Share index captures all listed companies but the firms I'm looking at are either FTSE100 or FTSE250 and I've gotten some somewhat different figures depending on what I use as my proxy
2) Over how long a time period should I look into the past? Right now I've gotten data from the past 5 years (think I heard that timeframe mentioned somewhere) but is that generally what's used in practice?
3) For the risk free rate I've used the yield on 10 year government gilts. Is this a good thing to go off of? And should I use the latest available yields or the average yield over some time period (say for example 5 years if I'm calculating my beta off of 5 years of data)
Thanks
1) If you are measuring risk based off of beta those will likely capture most of the market and should be good enough, the larger the sample the better though. 2) The longer the sample time horizon the better 3) Rf rate should be the length of investment holding period. Ex. 20 year rf bond if your holding period will be 20 years.
Ask yourself though does the correlation & st. deviation of a stock to the market really have anything to do with a company's inherent risk.
Thank you for your input.
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