ABC. Ltd. has a risk free asset yielding 0.02. During this period expected return of 0.09 and a standard deviation of 0.04 are based on past data of the market portfolio. The risk premium 0.07 is considered to be constan

CS Executive · Financial and Strategic Management · PYQS · June 2019
ABC. Ltd. has a risk free asset yielding 0.02. During this period expected return of 0.09 and a standard deviation of 0.04 are based on past data of the market portfolio. The risk premium 0.07 is considered to be constant throughout the period. A security has a coefficient of correlation with market portfolio of 0.75 and standard deviation is 0.08. The expected standard deviation of market portfolio is now 0.04. On the basis of the given data, find out: (ii) Security beta.

Answer & Explanation:

(ii) Security Beta: β = (σ s ÷ σ m ) x r m Where, β = Beta factor of investment σ s = Standard deviation of investment in security = 0.08 σ m = Market Portfolio standard deviation = 0.04 r m = Co-efficient of correlation of security with market portfolio = 0.75 β = (0.08 ÷ 0.04) x 0.75 = 2 x 0.75 = 1.5

Topics: Financial Management

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