Question

Assume the betas for securities​ A, B, and C are as shown​ here:

Security   Beta
A   1.44
B   0.84
C   -0.87

a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 12.9% 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 10.7% 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.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

01:15 C w ? ENG 08-06-2020 23 Х QZ273 X fx . QV QW QX QY QZ RA RB RC RD RE RE RG RH RI 250 251 252 a 253 254 255 256 b SECURITY AS CHANGE IN RETURN WILL BE SECURITY B'S CHANGE IN RETURN WILL BE SECURITY C'S CHANGE IN RETURN WILL BE [12.9 X 1.44] = [12.9 X 0.84) = [12.9 X -0.87] = 18.58 % 10.84 % -11.22 % -15.41 % 257 SECURITY A'S CHANGE IN RETURN WILL BE SECURITY B'S CHANGE IN RETURN WILL BE SECURITY C'S CHANGE IN RETURN WILL BE [-10.7 X 1.44] = [-10.7 X 0.84] [-10.7 X -0.87] = -8.99 % 9.31 % 258 259 RANK ACCORDING TO RISK SECURITY A SECURITY C SECURITY B 260 C 261 262 263 264 265 266 267 268 269 270 271 272 AS C HAS NEGATIVE BETA, IT HAS NEGATIVE RELATION WITH MARKET SO WHEN MARKET WILL FALL, SECURITY C WILL GENERATE POSITIVE RETURN DURING DOWNTURN OTHERWISE, SECURITY B IS BEST AS IT IS LEAST RESPONSIVE 273 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta VAR port future INDEX HEDGE INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right cli... +