What are the pros and cons of using industry averages for beta in CAPM?
The capital asset pricing model (CAPM) is a widely used tool for estimating the expected return of an investment based on its risk relative to the market. One of the key inputs in the CAPM formula is the beta coefficient, which measures the sensitivity of the investment to the market movements. However, estimating beta is not an easy task, and many analysts resort to using industry averages for beta instead of calculating it for each individual investment. In this article, we will explore the pros and cons of using industry averages for beta in CAPM.