The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of ___________.
A)1.01
B)0.95
C)1.13
D)0.90
E)none of the above

Question

Quizplus · Accepted Answer

The commonly used adjustment technique is to adjust the beta towards 1, assuming that the market is the best indicator of risk. To adjust the beta, we use the following formula: 
Adjusted beta = 0.5 + 0.5 * Beta
Plugging in the given beta of 0.85: 
Adjusted beta = 0.5 + 0.5 * 0.85 = 0.9 
Therefore, the adjusted beta is 0.90, which corresponds to choice D.

The Beta of a Stock Has Been Estimated as 0