Question

Below are information obtained from Yahoo finance on Eli Lilly (LLY)
Income Statement
Revenue:19.7B; Gross Profit:18.54B; EBITDA:5.33B
Balance Sheet
Total Cash:4.23B; Total Debt :8B; Shareholder’s Equity:16.87B
Ratios
Total Debt/Equity:54.41%; Current Ratio:1.11; Profit Margin:11.91%;    RAO :5.01%;    ROA:3.02%
Trading Information
Beta:0.34; Market Cap:83.78B; YTM on 10 year Treasury Bonds:5.73%; YTM on 10 year DIS Bond:6.37%;    10 year average return on the S&P500:12.2%;              Tax rate:40%

How is the above beta of LLY calculated?

		Variance of the LLY over the covariance of LLY and the market
		Covariance of the previous 5 years of return of LLY on covariance of the previous 5 years return of the S&P500
		Regression of return of the S&P500 less the risk free rate on the risk of LLY
		Regression of the previous 5 years of the market risk premium on the  previous 5 years return of LLY
		Slope of the regression of the previous 5 years of return of LLY on the previous 5 years return of the S&P500

Answer 1

Option 5 is correct -  Slope of the regression of the previous 5 years of return of LLY on the previous 5 years return of the S&P500

Beta is the sensitivity of the stock's returns to the overall market. That is, it is the % change in the stock's returns for every 1% change in the returns of the overall market. This is calculated by running a regression and finding the slope of the regression line with the overall market returns as the independent variable and the stock returns as the dependent variable.

Beta is also calculate with the formula : beta of stock = covariance of stock returns with market returns / variance of market returns. Therefore, Options 1 and 2 are incorrect.