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28 Nov 2019

A stock’s β (beta coefficient) is a measure of:

A. The stock return’s sensitivity to systematic risk

B. The stock return’s sensitivity to total risk

C. The stock’s overall value

D. The stock return’s sensitivity to unsystematic risk

E. The price of stock relative to its earnings.

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Reid Wolff
Reid WolffLv2
5 May 2019
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Related questions

Your research has determined the following information about the common stock of two particular firms. Stock A Stock B Expected Return: 10% 15% Standard Deviation 5% 9%

Part 1:

1. Explain what is meant by the stock❝s ❝Expected Return❝

2. Calculate each stock❝s coefficient of variation.

Under what situation is the coefficient of variation useful? Briefly explain.

4. Which stock is riskier?

5. What do you base your answer on?

6. What type of risk are we considering here?

7. Is there anything that can be done to reduce this type of risk? If so, what?

8. When is this type of risk most relevant?

Part 2: You did some additional research, and also found the following values for each stock❝s beta coefficient: Stock A Stock B Beta Coefficient 0.7 1.4 Other current information is as follows: --Current Risk-free Rate: 5% --Current Market Rate: 12%

1. What type of risk are we now considering?

2. What is the current Market Risk Premium?

3. What is the required return for each stock suggested by CAPM?

4. Will diversification reduce the type of risk identified in #1 above?

5. Is there anything that can help to reduce this type of risk in a portfolio of stocks? If so, what.

6. Suppose that you invest $1,000 in Stock A, $1,500 in Stock B, and $2,500 in Stock C that has a beta of 2.0. Find your portfolio❝s beta and required rate of return.

Use the Security Market Line method and information below to determine the cost of equity (aka expected return) for Stock A and Stock B.

The risk free rate is based solely on the on the US treasury yield curve

The equity market (i.e. the S&P 500) is expected to return 10.0%

Stock A has a beta (sensitivity to the S&P 500) of 0.80

Stock B has a beta (sensitivity to the S&P 500) of 1.20

Assume the risk free rate is 2.0%. Which of the following statements is FALSE:

A) Stock A is less sensitive to the performance of the S&P 500

B) Both stocks have the same risk free rate

C) Stock B has a larger market risk premium because it has a higher beta

D) Stock B is expected to outperform Stock A by 2.2%

E) Stock A is expected to return 8.4%

EVALUATING RISK AND RETURN Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
a. Calculate each stock’s coefficient of variation.

b. Which stock is riskier for a diversified investor?

c. Calculate each stock’s required rate of return.

d. On the basis of the two stocks’ expected and required returns, which stock would be
more attractive to a diversified investor?

e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.

f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

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