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.
1). 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? (Select the best choice below.)
A. The security and the market are equally risky because the market has the same beta of 1.20.
B. The security is more risky than the market because the market has a beta of 1.
C. The security is less risky than the market because the market has a beta of 1.
D. The security and the market are equally risky because the market has a beta of 1.
2). 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%.
3). 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%.
4. 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%.
1)
If a security has beta of 1.2 , then it means that for every 1 unit change in market return, the security returns change by 1.2 units. Hence, it is more riskier than market.
Answer is B. The security is more risky than the market because the market has a beta of 1.
2)
If a market increases by 15%, then as per the previous definiton, the security must increase more than 15% as its beta >1.
Answer is A. increase by more than 15%.
3)
Similarly if a market return decreases by 8%, the expected return on security decreases by more than 8% as its beta>1
Answer is E. decrease by more than 8%.
4)
If market return remains unchanged then the security returns also remain unchanged as the security is correlated to the changes in market returns.
Answer is C. remain unchanged
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