The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of
A) 1.27.
B) 1.32.
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) by using the formula: adjusted beta = 1/3 + 2/3 * (estimated beta). Using the given estimated beta of 1.4, the calculation is 1/3 + 2/3 * 1.4 = 1.27.

The Beta of a Stock Has Been Estimated as 1