Question

In the adjustment of beta, show that the Vasicek technique leads to a simple proportional weighting of the market Beta and the stock’s Beta if the standard error of all Betas is the same.

Answer 1

Vasicek adjustment computes beta as weighted average of OLS estimate and has no expectations.

Vasicek adjustment in beta calculation is included in Capital Asset Pricing Model ie CAPM.

OLS estimates are subject to high degree of estimation errors.

In this adjustment technique,the OLS best estimate which is more precise is given more weightage and the estimate which is less precise is given less weightage.

So, we can say that the Vasicek technique is a weighted average of Beta ..