Final answer:
The industry beta may be a better estimate due to the higher standard error of the firm estimate. Using the industry beta can provide a more accurate estimation as it considers a larger sample size and accounts for common risk factors and trends across firms in the industry.
Step-by-step explanation:
The industry beta may be a better estimate than the firm's own beta due to the higher standard error of the firm estimate.
Standard error measures the variation or uncertainty in the estimation process. A higher standard error indicates more uncertainty in the estimate, meaning it is less reliable. Therefore, using the industry beta, which encompasses a larger sample size and represents the average beta for similar firms in the industry, can provide a more accurate estimation.
For example, if a firm's own beta is based on a small sample size or few comparable companies in its industry, it may have a higher standard error and be more influenced by unique factors of the firm. In contrast, the industry beta considers a larger sample size and accounts for the common risk factors and trends across firms in the industry, leading to a more precise estimate.