Question

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique incorporating a weighting on long-run beta of 1.0 would provide an adjusted beta of

Answer 1

Answer: between 1 and 1.6

Explanation:

The Market Beta is 1.0 which is why in the long run, betas will equal 1 and so will move steadily towards 1 overtime.

The adjustment technique will therefore show a beta between 1 and 1.6 because the 1.6 will move on to 1 overtime.

To explain, the adjustment technique is as follows;

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

= 2/3(1.6) + 1/3

= 1.4

The adjusted beta of 1.4 is between 1 and 1.6.