Which of the Following Is NOT a Potential Problem with Beta

question 21

Multiple Choice

Which of the following is NOT a potential problem with beta and its estimation?

• A) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
• B) 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 than the "true" or "expected future" beta.
• C) The beta of an "average stock," or "the market," can change over time, sometimes drastically.
• D) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
• E) All of the statements above are potentially serious problems.

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Definitions:

Estimated Income

An estimate of the revenue anticipated to be generated during a certain timeframe.

Yearly Income

The total pre-tax earnings received by an individual or household over the course of one year from all sources combined.

SST

Total Sum of Squares, a measure used in statistics to quantify the variance in a dataset.

SSE

Sum of Squares due to Error, a measure of the discrepancy between the data and an estimation model, reflecting the unexplained variance within the model.