Question

Suppose market return can be +10% or -10% with equal probability.

When market return is +10%, stock A returns +5%.

When market return is -10%, stock A returns -5%.

What is the beta of stock A?

Answer 1

Change in Market Ret = 10% - ( -10% ) / 10%

=[ 10% + 10% ] / 10%

= 20% / 10%

= 200%

Change in Stock Ret =[ 5% - ( -5%) ] / 5%

=[ 5% + 5% ] / 5%

= 10% / 5%

= 200%

Particulars	Values
Change in Sec Ret	200%
Change in Market Ret	200%

Beta = Change in Security Ret / Change in Market ret
= 200 % / 200 %
= 1 Times

Beta is 1.

Particulars	Amount
Price at the End of Year (P1)	$        70.00
Price at the begining of Year(P0)	$      100.00
Div during the year	$           5.00

Ret = [ P1 - P0 + D1 ] / P0
= [ 70 - 100 + 5 ] / 100
= [ -25 ] / 100
= -0.25
I.e -25 %

Portfolio Return is the weighted avg return of securities in that portfolio

Stock	Weight	Ret	WTd Ret
A	0.70	10.00%	7.00%
B	0.30	20.00%	6.00%
Portfolio Ret Return			13.00%