A security has a beta of 1.20. Is this security more or less risky than the market? Explain. Assess the impact on the required return of this security in each of the following cases. a. The market return increases by 15%. b. The market return decreases by 8%. c. The market return remains unchanged.
A security has a beta of 1.20. Is this security more or less risky than the market? Explain. Assess the impact on the required return of this security in each of the following cases. a. The market return increases by 15%. b. The market return decreases by 8%. c. The market return remains unchanged.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:**Question 6: Analysis of Security Beta**
A security has a beta of 1.20. Is this security more or less risky than the market? Explain and assess the impact on the required return of this security in each of the following cases:
**a.** The market return increases by 15%.
**b.** The market return decreases by 8%.
**c.** The market return remains unchanged.
**Determine Risk Level:**
A security has a beta of 1.20. Is this security more or less risky than the market? (Select the best choice below.)
- **A.** The security and the market are equally risky because the market has a beta of 1.
- **B.** The security is more risky than the market because the market has a beta of 1.
- **C.** The security and the market are equally risky because the market has the same beta of 1.20.
- **D.** The security is less risky than the market because the market has a beta of 1.
**Case Analysis:**
**a.** If the market return increases by 15%, the expected return of the security with a beta of 1.20 will: (Select the best choice below.)
- **A.** increase by more than 15%.
- **B.** increase by less than 15%.
- **C.** remain unchanged.
- **D.** decrease by less than 8%.
- **E.** decrease by more than 8%.
**b.** If the market return decreases by 8%, the expected return of the security with a beta of 1.20 will: (Select the best choice below.)
- **A.** increase by more than 15%.
- **B.** increase by less than 15%.
- **C.** remain unchanged.
- **D.** decrease by less than 8%.
- **E.** decrease by more than 8%.
**c.** If the market return remains unchanged, the expected return of the security with a beta of 1.20 will: (Select the best choice below.)
- **A.** increase by more than 15%.
- **B.** increase by less than 15%.
- **C.** remain unchanged.
- **D.** decrease by less than 8%.
- **E.** decrease by more than 8%.
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