Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be:
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A. B. C. D.B
Beta is a measure of a stock's volatility in relation to the overall market. It indicates the degree to which a stock's price will move in response to changes in the market as a whole. A stock with a beta of 1.0 is expected to move in tandem with the market, while a stock with a beta of less than 1.0 is expected to be less volatile than the market, and a stock with a beta greater than 1.0 is expected to be more volatile than the market.
In this question, Espinosa Coffee & Trading, Inc.'s common stock has a beta of 0.75, which means that its price is expected to be less volatile than the overall market. The market beta is given to be 1.00, and the beta of the industry of which the company is a part is 1.10. Merrill Lynch is expected to calculate an adjusted beta for Espinosa's common stock.
To calculate the adjusted beta, Merrill Lynch will take a weighted average of the company's beta, the market beta, and the industry beta. The weights assigned to each beta will depend on the company's exposure to each factor.
One possible method of calculating the adjusted beta is to use the following formula:
Adjusted Beta = (Company Beta x 0.5) + (Market Beta x 0.3) + (Industry Beta x 0.2)
Using this formula and the given betas, we get:
Adjusted Beta = (0.75 x 0.5) + (1.00 x 0.3) + (1.10 x 0.2) Adjusted Beta = 0.375 + 0.3 + 0.22 Adjusted Beta = 0.895
Therefore, the adjusted beta for Espinosa Coffee & Trading, Inc.'s common stock is expected to be more than 0.75, but less than 1.10. The correct answer is B: more than 0.75, but less than 1.10.
It's worth noting that there are other methods of calculating adjusted beta, and the weights assigned to each beta may vary depending on the methodology used. However, in this question, the formula and weights provided above are the most appropriate way to calculate the adjusted beta.