Which of the following is NOT a potential problem with beta and its estimation?
A) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
B) Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta.
C) The beta of "the market," can change over time, sometimes drastically.
D) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

Question

Quizplus · Accepted Answer

Beta primarily measures the volatility of a security or a portfolio in comparison to the market as a whole. The statement that the beta of "the market" can change over time is not a problem with beta or its estimation per se, but rather a characteristic of markets themselves. Markets evolve and change over time, which can affect all financial metrics, not just beta. The other options (A, B, D) directly address challenges in estimating beta, such as lack of historical data, changes in company leverage or asset risk, and changing conditions that make past data less predictive of future risk.

Which of the Following Is NOT a Potential Problem with Beta