Question

In: Finance

Exhibit 5 Month Market Asset R Asset S 1 3% –5% 4% 2 –5% -6% 3%...

Exhibit 5

Month

Market

Asset R

Asset S

1

3%

–5%

4%

2

–5%

-6%

3%

3

1%

–4%

4%

4

–7%

8%

3%

5

6%

–9%

4%

Use Exhibit 5. The data gives the historic return over the past five months for the market portfolio and two assets: R and S. Which of the answers below best describes the historic beta (β) for R and S?

A. βR < 0; βS = 0

B. βR > 0; βS > 1

C. βR > 0; βS < 0

D. βR > 1; βS = 0

E. βR < 0; βS > 0

Solutions

Expert Solution

The given solution has been attached in the excel sheet which shall provide complete reference formula for the given case. Also the student can approach with conventional system of answering (Formula based) but the solution could be much comprehensive.

Following is the formula table for computation of beta for each of the stock:

Following is the formula table for computation of beta for each of the stock:

The formula table can be referred for computation of the above values so that answer could be obtained at their own side also for cross-check. The beta values for stock R and stock S is -0.88 and 0.09 respectively.

Hence the correct option is E where the beta of Stock R is less than 0 and beta of stock of S is more than 0.

If you still have any doubt, then please ping me in the comment box, I would love to help you.

jeff jeffy answered 9 months ago
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