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Do Homework - Cristian Clementi - Google Chrome Secure | https://www.mathxl.com yerHomework.aspx?homeworkId=448 577573 &questionld; = 1 &flushed; = false&cld-4704237;&centerwin; =yes FIN-350-MWF1230A-Fundamentals of Business Financs Cristian Clementi 12/3/17 7:15 PM Homework: Module 7, Chapter 8 Score: 0 of 5 pts P8-20 (similar to) Save 6 of 8 (1 complete HW Score: 10.42%, 4.17 of 40 pts Question Help Interpreting beta A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.4 a. If the market return increased by 15%, what impact would this change be expected to have on the asset's return? b. It the market return decreased by 11%, what impact would this change be expected to have on the assets 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? it the market return increased by 15%, the impact on the assets retum s 96. Round to one decimal place. Enter a negative percentage number if the asset return decreases) a- Enter your answer in the answer box and then click Check Answer Clear All Check Answer O Type here to search 7:15 PM 12/3/2017

Explanation / Answer

According to CAPM,

Expected return = risk free rate + beta*(Market return - risk free rate)

a.

If market return is increased by 15%,

From the CAPM formula,

Expected return increases by 15%*beta = 1.4*0.15 = 0.21 = 21% of market return

b.

If market return is decreased by 11%

Expected return decreaess by 11%*beta = 1.4*0.11 = 0.1540 = 15.40% of market return

c.

If market return doesn't change, then the expected return remains the same.

d. Stock is considered to be more risky than the market, because beta is greater than 1.

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