CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
An analyst's raw regression beta for a company is 1.40. Using the Blume adjustment (2/3 of the raw beta plus 1/3 of 1.0), the adjusted beta is closest to:
The adjusted beta is two-thirds of 1.40 plus one-third of 1.0, which is 0.933 plus 0.333, or about 1.27. The adjustment pulls extreme raw betas toward the market average of 1.0, reflecting mean reversion in betas.
- A1.27Correct
- B1.33
- C1.40
Explanation
Adjusted beta = (2/3)(1.40) + (1/3)(1.0) = 0.9333 + 0.3333 = 1.267, about 1.27. 1.33 would come from weighting 1/3 raw and 2/3 of 1.0 incorrectly reversed in another way (e.g., simple average with 1.27 mistaken), and 1.40 is unadjusted.
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