Limitations of Regression Betas

This question tests whether a candidate understands how beta is estimated from historical share price data and why that estimate may be an imperfect input in valuation. In interviews, bankers want you to recognize that a regression beta reflects past market behavior, can be noisy because of statistical and model choices, and may not fully reflect a company’s current leverage or risk profile. Candidates should be able to explain why these issues matter when using beta in cost of equity and intrinsic valuation, and why judgment is needed when relying on market based inputs.