Think about the risks inherent in your Ficticious Company and how to quantify these risks. Download the data provided and calculate the measure of risk for this company (defined as Beta in the Capital Asset Pricing Model - CAPM) and explain why this calculation is a measure of risk. Discuss when this type of calculation is appropriate, and when the coefficient of variation is an appropriate measure of risk.
The following website might be helpful: Revisiting the Capital Asset Pricing Model http://www.stanford.edu/~wfsharpe/art/djam/djam.htm
See attached file for all the answers
Explain why beta is a measure of risk. Discuss when this type of calculatin is appropriate, and when the coefficient of variation is an appropriate measure of risk.
In finance risk is defined as the chance that something other than what is expected occurs?that is, variability of returns. When we examine how risky a single investment is by itself, we are examining stand-alone risk; when we examine how risky an investment is when it is combined in a portfolio with other investments, we are examining portfolio risk.
"Measuring Stand-Alone Risk: The Standard Deviation?measures the tightness, or variability, of a set of outcomes?that is, a probability distribution; the tighter the distribution, the less the variability of the outcomes, and the less risk associated with the event; as a result, standard deviation is a measure of risk for a single investment? that is an investment held by itself (alone).
Because standard deviation measures variation, which is associated with risk, we generally say that an investment with a lower standard deviation is considered less risky than an ...
The solution calculates beta using regression analysis for the data provided. It also discusses why beta is a measure of risk and when this type of calculatin is appropriate, and when the coefficient of variation is an appropriate measure of risk.