Imagine you wish to estimate the betas for two investments, A and B. You have ga

Question

Imagine you wish to estimate the betas for two investments, A and B. You have gathered the following return data for the market and for each of the investments over the past 10 years, 2002-2011.

Historical Returns

Investments

Year   Market A B

2002 6% 11% 16%

2003 2 8 11

2004 -13 -4 -10

2005 -4 3 3

2006 -8 0 -3

2007 16 19 30

2008 10 14 22

2009 15 18 29

2010 8 12 19

2011 13 17 26

a. On a set of market return (x-axis)-investment return (y-axis) axes, use the data to draw the characteristic lines for investments A and B on the same set of axes.

b. Use the characteristic lines from part a to estimate the betas for investments A and B.

c. Use the betas found in part b to comment on the relative risks of investments A and B.

Explanation / Answer

Plotting the points and estimating the slopes (betas) I get approximately 0.78 for A and 1.39 for B so B is definitely the riskier due to it's higher beta.

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