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Solutions to Web Appendix 8A

Solutions to Web Appendix 8A - SolutionstoProblems...

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Web Appendix 8A Calculating Beta Coefficients Solutions to Problems 8A-1 a. b = Slope = 0.62.  However, b will depend on students’ freehand line. Using a calculator, we find b  = 0.6171   0.62. b. Because b = 0.62, Stock Y is about 62% as volatile as the market; thus, its relative risk is about  62% that of an average stock. c. 1. Stand-alone risk as measured by   σ   would be greater, but beta and hence systematic  (relevant) risk would remain unchanged.  However, in a 1-stock portfolio, Stock Y would be  riskier under the new conditions. 2. CAPM assumes that company-specific risk will be eliminated in a portfolio, so the risk  premium under the CAPM would not be affected. However, if the scatter were wide, we would  not have as much confidence in the beta, and this could increase the stock's risk and thus its  risk premium. Appendix 8A  Calculating Beta Coefficients Answers and Solutions 1 (%) r Y 40 30 20 -30 -20 -10 10 20 30 40 (%) r M
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d. 1. The stock's variance and  σ  would not change, but the risk of the stock to an investor holding  a diversified portfolio would be greatly reduced, because it would now have a negative  correlation with r M .
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