Beta Coefficients
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I need help trying to solve the below problem. I understand that B is at more risk but not understanding what the formula would be to come up to the rM and beta coefficients of A and B.
Security A has an expected return of 10.4 percent with a standard deviation of 15 percent, and a correlation with the market of 0.85. Security B has an expected return of 0.73 percent with a standard deviation of 20 percent, and a correlation with the market of 0.67. The standard deviation of rM is 12 percent.
Required:
a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why?
b. What are the beta coefficients of A and B? (Calculations are required)
c. If the risk-free rate is 6 percent, what is the value of rM?
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Solution Summary
The expert examines beta coefficients for security risks. The risk-free rates of 6 percent are determined. The beta coefficient are given.
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a. Under CAPM, risk and return go together, Security B has a higher expected return as compared to Security A and so would have a higher ...
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