Final answer:
To estimate a firm's beta, the weighted average of the betas for its individual projects is used, taking into account the relative size and contribution of each project to the firm's risk.
Step-by-step explanation:
The beta for a firm can be estimated by taking the weighted average of the beta for the individual projects of the firm. This means the correct answer is B) taking the weighted average of the beta for the individual projects of the firm. When calculating beta, it is important to consider the size of each project and its contribution to the overall risk of the firm, hence the need for a weighted average rather than a simple sum or unweighted average.
Betas are a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates greater volatility than the overall market, and a beta less than 1 indicates less volatility.
The method of calculating a weighted average considers the relative size of each project contributing to the firm's overall risk profile, in essence capturing the idea that larger projects with more capital investment will have a more significant impact on the firm's total risk than smaller projects.