Question

Which of the following is not a potential problem when estimating and using betas, i.e., which statement is false?

Answer 1

Answer:

a.) The beta of an "average stock," or "the market," can change over time, sometimes drastically.

Explanation:

Estimation using betas in finance can be associated to the (CAMP) Capital Asset Pricing Model, it allows the calculation of volatility of the stock in relation to the market.

It should be noted that there are potential problems that can be experienced when estimating and using betas, and these are;

1) Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.

2)The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future.

3)The fact that a security or project may not have a past history that can be used as the basis for calculating beta.

4) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

Hence among the given option, option A is false.