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CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models

Compared with using five years of monthly returns, estimating beta with a much shorter window of daily returns is most likely to:

Using daily returns over a short window gives more observations, but the estimate covers a limited period and may be distorted by thin trading, so it can be less representative of the firm's typical risk. It does not remove estimation error or force beta toward 1.0.

  1. Aeliminate the standard error of the beta estimate
  2. Bproduce more observations but reflect a less stable period of the firm's riskCorrect
  3. Cguarantee a beta closer to 1.0

Explanation

Higher-frequency data give more observations, but a short window may not reflect the firm's current risk and daily returns can suffer from nonsynchronous trading. Standard error is never eliminated, and beta need not move toward 1.0.

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