Question

Interpreting beta   A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 0.7.

a.  If the market return increased by 20%, what impact would this change be expected to have on the asset's return?

b. If the market return decreased by 8%, what impact would this change be expected to have on the asset's return?

c.  If the market return did not change, what impact, if any, would be expected on the asset's return?

d.  Would this asset be considered more or less risky than the market?

a.  If the market return increased by 20%, the impact on the asset's return is __% (Round to one decimal place. Enter a negative percentage number if the asset return decreases.)

Answer 1

Expected Return = Risk-free Rate + Beta*[Market Return - Risk-free Rate]

a). Change in Asset Return = Beta * Change in Market Return = 0.7 * 20% = 14%

b). Change in Asset Return = Beta * Change in Market Return = 0.7 * -8% = -5.60%

c). If the market return doesn't change, then the asset return would not be changed.

d). As the beta is less than 1, which is less than the market beta of 1, then it is considered less risky than the market,i.e., Change of 1% in Market will lead to change of 0.70% in that asset.