when to use adjusted beta or non adjusted beta?

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vicky_cool400

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GUys
If we are given both adjusted and non adjusted beta , which is ti considered to calculate cost of equity
 
Well, if you follow the material (portfolio readings), you’re supposed to use the adjusted beta. The basic adjustment is 0.333 + 0.667x, where x is the historical beta. The argument is that betas are mean-reverting (to 1), so this adjustment shifts the historical beta towards 1.
 
Thanks a lot so this is a rule or in any case we are supposed to use non adjusted beta
 
If they have supplied both the betas, use the adjusted beta. However, if they have supplied a beta by itself without any mention of adjusted/unadjusted, you shouldn’t be adjusting anything, especially in the equity section on the exam.
They could get evil by incorporating portfolio theory in the equity section, supplying an unadjusted beta, but asking us to use the adjusted beta for CAPM calculations. Even in that case, I’d think they would supply us with the “adjustment equation” (like 0.333 + 0.667x). So if the unadjusted beta is 1.5, adjusted beta for calculation would be 1.33.
 
Please also read a “small footnote” in the book - which refers to this adjusted beta as “Bluhm’s beta”. This is terminology and could get thrown at you in the exam.
 
Thanks cpk for the ifo. Please do share such terminologies so that we can benefit
 
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