Chapter 8-Web Appendix 8A Solutions

Chapter 8-Web - Web Appendix 8A Calculating Beta Coefficients Solutions to Problems 8A-1 a b = Slope = 0.62 However b will depend on students’

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Unformatted text preview: 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 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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This note was uploaded on 01/11/2012 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Chapter 8-Web - Web Appendix 8A Calculating Beta Coefficients Solutions to Problems 8A-1 a b = Slope = 0.62 However b will depend on students’

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