Question 18: Is Dejong correct w respect to her conclusion regarding the causes of the differences b/t her beta estimate for O’Connor and the published beta estimates, and her strategy for adjusting her beta estimate to more quickly approach the mean reverting level of beta? Correct answer: B. Yes on one account, and no on the other. I got this question right, but for the wrong reasons. Instead of using 1/3 she uses 1/2 when calculating adjusted beta. Answer explanation says "The adjusted beta forecast will move toward 1 more quickly for larger values of “a0” so she is correct in regard to this matter. I probably need to brush up on quant but does anyone know where the value of “a0” is shown and why it is considered large?
yes i remember this exact question. on adjusted beta, the MRL is 1. you typically calculate it as 2/3 *1 + 1/3 * Forecasted Beta. In the question though, she uses 1/2 instead which will get her closer to one quicker. CP, I would like your input on this as well.
isn’t it 1/3(1) + 2/3(historic) instead of the otherway around as you have it above? just checked the book: adjusted beta = 2/3 * regression beta + 1/3(1) …> so if you used 1/2(1) --> 1/2 > 1/3 you would move to 1 quicker. I think that is what they are trying to say.
Okay, I see what the question asks now. I originally read it as "is she correct with her assumption that she SHOULD use 1/2 to more quickly approach 1.