When estimation of beta is based on the Capital Asset Pricing Model the standard
recommendation is to use five years of monthly data and a value-weighted index. Given
the importance of the beta estimate obtained for financial decisions, such as those
involved in portfolio management, capital budgeting, and performance evaluation,
there is surprisingly little research evidence in support of this recommendation.
The objective of this paper is to address this shortcoming. For this purpose the
relative efficiency of beta estimates which result from using different data frequencies,
time periods, and indexes is examined. It is found that five years of monthly data
and an equal-weighted index, as opposed to the commonly recommended value-weighted
index, provides the most efficient estimate.