Question

Assume each firm within an industry has similar operations and financial structures as the industry as a whole. Which one of these statements related to beta is correct given this assumption?

a. Industry betas are less reliable than firm betas.
b. Firms should use their own betas rather than the industry beta.
c. Betas should be computed on an annual basis.
d. The error in beta estimation for a single security exceeds the error for a portfolio of securities.
e. All firms in the industry will have the same beta.

Answer 1

Answer: D. The error in beta estimation for a single security exceeds the error for a portfolio of securities.

Step-by-step explanation:

If each firm within an industry has identical operations and thesame financial structures as the industry as a whole, then the error in beta estimation for a single security exceeds the error for a portfolio of securities.

It should be noted that all the firms in the industry will not have the same beta. Also, betas should not be computed on an annual basis. Therefore, the correct option is D.