Question

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. a. 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 a beta of 1. B. The security is less risky than the market because the market has a beta of 1. C. The security and the market are equally risky because the market has the same beta of 1.20. D. The security is more risky than the market because the market has a beta of 1. a. 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%.

Answer 1

A positive beta of stock suggest that it moves with market movement. Magitude of movement is measure by amount of Beta and nature of movement with sign of Beta. When Beta is 1.20 means if market moves by 10% (either way) security will move by 10% X 1.2 = 12% (either way). While market is moving up the security will outperform market by 0.2 times but in reverse scenario it will lose by 0.20 than market. Hence in general, this is riskier secuirty than market. When compared the market beta with it self it is always 1. So higher beta than market is denoted as high risky. There fore correct answer is D

If Market return increases by 15% then require return on Secutiry should increase by 15% X1.2 = 18%

If Market return decreases by 8% then require retur on security will fall by 8% X 1.2 = 9.6%

If there is no change in market return than expected return will remain same.

So correct answer is A i.e. security return increases by more than 15%