Bata coefficients Katherine Wilson is wondering how much risk she must accept in

Question

Bata coefficients

Katherine Wilson is wondering how much risk she must accept in order to generate a reasonable return on her portfolio. The risk-free return currently is 5 percent. The return on the market portfolio is 16 percent. Use the CAPM to calculate the bata coefficient associated with each of the following portfolio returns.

a) 10 percent

b) 15 percent

c) 18 percent

d) 20 percent

e) Draw a security market line (SML)based on the above data Katherine is risk-averse. What is the highest return she can expect if she is unwilling to take more than an average risk

Explanation / Answer

Katherine Wilson is wondering how much risk she must accept in order to generate a reasonable return on her portfolio. The risk-free return currently is 5 percent. The return on the market portfolio is 16 percent. Use the CAPM to calculate the bata coefficient associated with each of the following portfolio returns.

a) 10 percent

Beta Coeffecient = (Expected Return - risk-free return)/(return on the market - risk-free return)

Beta Coeffecient = (10%-5%)/(16%-5%)

Beta Coeffecient = 0.45

b) 15 percent

Beta Coeffecient = (Expected Return - risk-free return)/(return on the market - risk-free return)

Beta Coeffecient = (15%-5%)/(16%-5%)

Beta Coeffecient = 0.91

c) 18 percent

Beta Coeffecient = (Expected Return - risk-free return)/(return on the market - risk-free return)

Beta Coeffecient = (18%-5%)/(16%-5%)

Beta Coeffecient = 1.18

d) 20 percent

Beta Coeffecient = (Expected Return - risk-free return)/(return on the market - risk-free return)

Beta Coeffecient = (20%-5%)/(16%-5%)

Beta Coeffecient = 1.36

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