Question

A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.7. a. If the market return increased by 19​%, what impact would this change be expected to have on the​ asset's return? b. If the market return decreased by 9​%, what impact would this change be expected to have on the​ asset's return? c. If the market return did not​ change, what​ impact, if​ any, would be expected on the​ asset's return? d. Would this asset be considered more or less risky than the​ market?

Answer 1

a. If the market return increased by 19​%, what impact would this change be expected to have on the​ asset's return?

• if the market return increases by 19%, then the asset's return should increase by beta x Δ in market return = 1.7 x 19% = 32.3%

b. If the market return decreased by 9​%, what impact would this change be expected to have on the​ asset's return?

• if the market return decreases by 9%, then the asset's return should decrease by beta x Δ in market return = 1.7 x -9% = -15.3%

c. If the market return did not​ change, what​ impact, if​ any, would be expected on the​ asset's return?

• the asset's return should not change

d. Would this asset be considered more or less risky than the​ market?

• the market's beta is 1, and since this asset's beta is 1.7, it is clearly much more riskier than the market. That is why any change in the market return should result in a much larger change in asset return.