Question

Suppose that the market portfolio is equally likely to increase by​ 24% or decrease by​ 8%. Security​ "X" goes up on average by​ 29% when the market goes up and goes down by​ 11% when the market goes down. Security​ "Y" goes down on average by​ 16% when the market goes up and goes up by​ 16% when the market goes down. Security​ "Z" goes up on average by​ 4% when the market goes up and goes up by​ 4% when the market goes down. The expected return on security with a beta of 1 is closest to: A. 4.0% B. 3.2% C. 8.0% D. -4.0%

Answer 1

Beta is a measure of the sensitivity of a security's return to the market return

If the Beta is 1, then the expected return on security = expected return on market

Market portfolio is equally likely to increase by​ 24% or decrease by​ 8%

Expected return on market portfolio = (0.50 * 24%) + (0.50 * -8%) = 8%

Expected return on security with beta of 1 = expected return on market portfolio = 8%