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Assume the betas for securities A, B, and C are as shown here: a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13.6% over the next period. b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 10.8% over the next period. c. Rank and discuss the relative risk of each security on the basis of your findings. Which security might perform best during an economic downturn? Explain.

Assume the betas for securities A, B, and C are as shown here: a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13.6% over the next period. b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 10.8% over the next period. c. Rank and discuss the relative risk of each security on the basis of your findings. Which security might perform best during an economic downturn? Explain.

Essentials Of Investments
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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CH 5 Q7 Practice 

## Understanding Beta Values and Security Returns Assume the betas for securities A, B, and C are as shown below: ### Tasks: **a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13.6% over the next period.** **b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 10.8% over the next period.** **c. Rank and discuss the relative risk of each security based on your findings. Which security might perform best during an economic downturn? Explain.** ### Data Table: | Security | Beta | |----------|------| | A | 1.56 | | B | 0.58 | | C | -0.18 | (Security A's change in return will be calculated in percentages, rounded to two decimal places.) ### Analysis: - **Increased Market Return**: Calculate the expected change in returns for securities A, B, and C using their beta values multiplied by the market's increased return rate of 13.6%. - **Decreased Market Return**: Calculate the expected change in returns using the market's decreased return rate of 10.8%. ### Considerations: - A higher beta indicates greater volatility and risk, suggesting higher potential returns during market upswings but larger losses during downturns. - Conversely, a lower or negative beta may indicate stability or movement inverse to the market, potentially beneficial during economic downturns. These calculations and evaluations will help you understand how different securities react to market changes based on their beta values.
Transcribed Image Text:## Understanding Beta Values and Security Returns Assume the betas for securities A, B, and C are as shown below: ### Tasks: **a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 13.6% over the next period.** **b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 10.8% over the next period.** **c. Rank and discuss the relative risk of each security based on your findings. Which security might perform best during an economic downturn? Explain.** ### Data Table: | Security | Beta | |----------|------| | A | 1.56 | | B | 0.58 | | C | -0.18 | (Security A's change in return will be calculated in percentages, rounded to two decimal places.) ### Analysis: - **Increased Market Return**: Calculate the expected change in returns for securities A, B, and C using their beta values multiplied by the market's increased return rate of 13.6%. - **Decreased Market Return**: Calculate the expected change in returns using the market's decreased return rate of 10.8%. ### Considerations: - A higher beta indicates greater volatility and risk, suggesting higher potential returns during market upswings but larger losses during downturns. - Conversely, a lower or negative beta may indicate stability or movement inverse to the market, potentially beneficial during economic downturns. These calculations and evaluations will help you understand how different securities react to market changes based on their beta values.
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