- CFA Exams
- 2021 CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 4. Estimating Beta and Determining a Project Beta
CFA Practice Question
Which statements are true?
II. The pure play method can only be used after a project has begun operation.
III. The pure play method estimates the beta of a project by using as a proxy the beta of a company that does nothing but the activity dictated by the project in question.
I. In the pure play method a firm averages the betas of companies that are in the same line of business as the project being evaluated.
II. The pure play method can only be used after a project has begun operation.
III. The pure play method estimates the beta of a project by using as a proxy the beta of a company that does nothing but the activity dictated by the project in question.
Correct Answer: I and III
While a project's risk is incorporated into the risk of the company as a whole, its individual risk profile could be remarkably different from the risk profile of the company as a whole. The only time that a company's beta may be used as a proxy for a project's beta is when the project has a risk profile that is largely similar to that of the corporation as a whole.
User Contributed Comments 5
User | Comment |
---|---|
thecfaguy | How come 1. ?? |
Shaan23 | Seriously you're asking why 1? That's what the entire unit is about. That definition |
praj24 | LOL ^ that cracked me up! |
jfermin315 | been on level 1 since 2012 ^ |
ashish100 | or his comment is just that old |