If a firm wishes to undertake a project with a different risk than its own, what is the best method by which to estimate the project's beta?

Question

Quizplus · Accepted Answer

The best method to estimate the project's beta when it has a different risk than the firm's own is to use a company in the same business as the project. This is because the beta of a company is affected by the risk of its underlying business activities, and using a comparable company in the same industry as the project will provide a more accurate estimate of the project's beta. Using a company in the same business as the firm or making a risk adjustment to the firm's beta may not reflect the specific risk characteristics of the project. A management approximation should not be relied upon as it may be subject to biases and personal views.

If a Firm Wishes to Undertake a Project with a Different