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

When estimating a stock's beta from a market model regression, using a longer data series with more frequent observations (for example, 5 years of weekly returns rather than 1 year of monthly returns) will most likely:

A longer series with more frequent returns gives more observations and a more precise estimate, but it may cover periods when the company's business or leverage was different, so the estimated beta may not reflect current risk. It does not guarantee higher R-squared or remove the case for adjustment.

  1. Aincrease the number of observations but risk including periods in which the company's fundamental risk differedCorrect
  2. Beliminate the need to adjust the beta toward 1.0 because the estimate becomes unbiased
  3. Cguarantee a higher R-squared because more data always improves the fit of the regression

Explanation

More observations reduce estimation error, but a long window may span changes in the firm's business or leverage, so beta may no longer reflect current risk. Adjustment for mean reversion is a separate matter, and R-squared does not necessarily rise with more data.

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