Reading 64: Portfolio Concepts-LOS H习题精选 developed, 2010, discuss, adjusted

honeycfa

LOS h: Calculate an adjusted beta, and discuss the use of adjusted and historical betas as predictors of future betas.

Adjusted betas were developed in an effort to compensate for:

A) traditional beta’s limitations in assessing the risk of extremely volatile stocks.

B) inaccurate forecasts for the efficient frontier based on traditional beta.

C) the weaknesses of standard deviation as a risk measurement.

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Adjusted beta was developed to compensate for the beta instability problem, or the tendency of historical betas to generate inaccurate forecasts. Extreme volatility is not an issue; nor is standard deviation.

 

luqian55

THANKS

solitute

thanks

honeycfa

Martz & Withers Enterprises has a beta of 1.6. We can most likely assume that:

A) calculating an adjusted beta will ease the downward pressure on the forecasted beta.

B) the future beta will be less than 1.6 but greater than 1.0.

C) the standard error on the future beta forecast is positive.

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The standard error is always expected to be zero, and the beta has nothing to do with that estimate. In the case of Martz & Withers, adjusted beta will almost certainly be lower than the current beta. Most adjusted beta calculations are as follows: adjusted beta = 2/3 + (1/3 × historical beta). In this case, adjusted beta is 1.2. Not everyone will use the two-thirds/one-third relationship, but any adjusted-beta equation will result in a value between 1.0 and 1.6.

honeycfa

Conner Cans shares have a beta of 0.8. Assuming α₁ is 40%, Conner’s adjusted beta is closest to:

A) 0.92.

B) 1.12.

C) 0.88.

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Adjusted beta = α₀ + α₁ × beta where α₀ and α₁ must sum to 1, so α₀ = 60%.
Adjusted beta = 60% + 40% × 0.8 = 0.92.

honeycfa

Martz & Withers Enterprises has a beta of 1.6. We can most likely assume that:

A) calculating an adjusted beta will ease the downward pressure on the forecasted beta.

B) the future beta will be less than 1.6 but greater than 1.0.

C) the standard error on the future beta forecast is positive.

---

The standard error is always expected to be zero, and the beta has nothing to do with that estimate. In the case of Martz & Withers, adjusted beta will almost certainly be lower than the current beta. Most adjusted beta calculations are as follows: adjusted beta = 2/3 + (1/3 × historical beta). In this case, adjusted beta is 1.2. Not everyone will use the two-thirds/one-third relationship, but any adjusted-beta equation will result in a value between 1.0 and 1.6.