Where thin trading is present in a market index used for the approximation of a beta,the beta will be __________ for a thinly traded company,and __________ for a frequently traded stock.

A) understated; overstated
B) overstated; understated
C) understated; understated
D) overstated; overstated

Question

Where thin trading is present in a market index used for the approximation of a beta,the beta will be __________ for a thinly traded company,and __________ for a frequently traded stock.

A) understated; overstated
B) overstated; understated
C) understated; understated
D) overstated; overstated

Quizplus · Accepted Answer

Thin trading has an important impact on beta estimation,as it affects both equity return estimation and market return estimation.In general,where thin trading is present,beta estimates for thinly traded stocks are underestimated (downward biased)and the beta estimates for heavily traded stocks are overstated (upward biased).

Where Thin Trading Is Present in a Market Index Used