Assume the betas for securities A, B, and C are as shown here: EEB a. Calculate

Question

Assume the betas for securities A, B, and C are as shown here: EEB a. Calculate the change in return for each security if the market experiences an increase in its rate of return of 12.9% over the next period. b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 9.9% over the next period. c. Rank and discuss the relative risk of each security on the basis of your findings. Which security might perform best during an economic downturn? Ex Data Table a. Calculate the change in retum for each security if the market experiences an increase in its rate of return of 12.9% over the next period. Security A's change in return wil be 1 %. (Round to two decimal pla Security B's change in retun w be Security C's change in return will be[ ]%. (Round to two decimal places.) b. Calculate the change in return for each security if the market experiences a decrease in its rate of return of 9.9% over the next period. Security A's change in retum wil be L96. Security B's change in retum wil be %. (Round to two decimal pla Security C's change in return will be | %. (Round to two decimal places.) c. Rank and discuss the relative risk of each security on the basis of your findings. Which security might perform best during an economic downturn? Explain. (Selec the best choice below.) O A. During an economic downturn, it can probably be assumed that the market retum would decrease. If this occurred, security C would perform best. Otherwise, security B would be best since it would be least responsive to a change in the ces.) D%. (Round to two decimal places.) Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Security Beta 1.36 0.78 -0.88 (Round to two decimal places.) ces.) PrintDone market return. O B. Security C could be called defensive since it moves in the opposite direction from the market (its return increased when the market return fell and vice versa). O C. Security B is the least risky since its retum is least responslve (regardless of direction) to changes in the market return. O D. Security A is the most risky. It has the highest relevant risk, as determined by the beta values and the greater changes in security A's return for a gliven change in the market return. E. Al the above statements are correct.

Explanation / Answer

Ans a

If market experiences an increase in its rate of return of 12.9%,

then, Security A's change in return will be (12.9 x 1.36) = +17.54% (increase)

Security B's change in return will be (12.9 x 0.78) = +12.06% (increase)

Security C's change in return will be(12.9 x -0.88) = -11.35% (decrease)

Ans b

If market experiences an decrease in its rate of return of 9.9%,

then, Security A's change in return will be (-9.9 x 1.36) = -13.46% (decrease)

Security B's change in return will be (-9.9 x 0.78) = -7.72% (decrease)

Security C's change in return will be(-9.9 x -0.88) = 8.71% (increase)

Ans c

E. all of he above statements are correct.

Higher the Beta higher is the risk of the secutity. when market is in down turn the stock with negative beta will increase and vice versa. the stock with beta closest to 1 is having the least risk to market volatility.

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