The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of
A) 1.20.
B) 1.53.
C) 1.13.
D) 1.0.

Question

Quizplus · Accepted Answer

The commonly-used adjustment technique for beta is the Blume's method, which adjusts the beta towards 1 (the market beta). It uses the formula: adjusted beta = (2/3) * beta + (1/3). For a beta of 1.8, the adjusted beta would be (2/3)*1.8 + (1/3) = 1.2 + 0.33 = 1.53.

The Beta of a Stock Has Been Estimated as 1