The beta for a firm can be estimated by
A) adding up the betas of the individual projects of the firm.
B) taking the weighted average of the betas for the individual projects of the firm.
C) taking the simple average of the betas for the individual projects of the firm.
D) None of the above

Question

Quizplus · Accepted Answer

Beta for a firm is estimated by taking the weighted average of betas for individual projects of the firm. Each project has a different level of risk, and therefore, the weight assigned to each project's beta should reflect its relative contribution to the overall risk of the firm. A simple average does not take into account the size of each project or its contribution to the overall risk, while adding up the betas will result in an inaccurate estimation of beta as it fails to consider the correlation among the projects. Therefore, the best choice is to take a weighted average.

The Beta for a Firm Can Be Estimated by