Question

If a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of Group of answer choices zero or less. between 0.0 and 1.0. between 1.0 and 1.35. greater than 1.35.

Answer 1

Answer: between 1.0 and 1.35

Explanation:

The Market beta is 1 and for this reason all Betas will usually equal 1 on average because they will usually move towards 1.

This means that when adjusted, the Beta will move from it's current number towards 1 so when adjusted, the Beta will be between it's current figure and 1. In this case that is 1.35 so the beta will be between 1 and 1.35.

The formula however is;

Adjusted beta = 2/3(sample beta) + 1/3(1)

= 2/3(1.35) + 1/3

= 1.23

The adjusted figure is 1.23 which is between 1 and 1.35.