Question

Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Security Beta 1.37 0.77 -0.87 Print Done

Answer 1

Answer a:

The beta of market being 1, if market experiences increase in its rate of return of 12.5% over the next period by, change in return of each security will = 12.5% * Beta (of respective security)

Hence:

   

Security A's change in return will be Security B's change in return will be Security C's change in return will be 17.13 % 9.63 % 10.88

Answer b:

Change in return of each security will = 10.2% * Beta (of respective security)

Answer c:

As we observe from answers a and b above:

Rank of relative risk (most risky to least risky) of each security will be:

Rank 1: Security A

Rank 2: Security C

Rank 3: Security B

During economic downturn, security C will perform best since it has negative beta. When market returns are negative security C will give positive return.

Choice of options:

Correct answer is:

E. All the above statements are correct.

Explanation:

As explained above statements A, B and C are correct. Statement D is also correct since Security has negative beta and it moves in opposite direction of the market and is defensive.

As such most appropriate option would be option E.