Suppose beta = 1.75. Give a technical definition of beta using the labels of the axes...

Suppose beta = 1.75. Give a technical definition of beta using the labels of the axes for 2. determining the value of beta on the appropriate graph.

Expert Solution

Beta is a measure of relative risk of a security or we can say it is a measure of systematic risk of the security. In CAPM model the risk consist of systematic risk and non-systematic risk, when the non-systematic risk is diversified away from the portfolio there is only systematic risk in the portfolio, so beta measures risk in relative to the market as to whether the security is more risky or less risky than the market.

The required rate in CAPM model is equal to

Risk free rate + beta*Market risk premium

Let the risk-free rate be 3% and market risk premium be 7%

The graph of beta consists of beta on the X-axis and required rate on the Y-axis

Beta	Required rate
0.50	6.50%
1.00	10.00%
1.75	15.25%
2.00	17.00%

Here the beta is on the X-axis and the required rate on the Y-axis

jeff jeffy answered 2 years ago

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