Graphical derivation of beta A firm wishes to estimate graphically the betas for

Question

Graphical derivation of beta A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the marker portfolio and for both assets over the last 10 years, 2006-2015. a. On a set of "market return (x axis)-asset return (y axis)" axes, use the data given to draw the characteristic line for asset A and for asset B. b. Use the characteristic lines from part a to estimate the betas for assets A and B. c. use me betas found in part b to comment on the relative risks of assets A and B.

Explanation / Answer

Actual Return year Market Portfolio % Asset A % Asset B % 2006 6 11 16 2007 2 8 11 2008 -13 -4 -10 2009 -4 3 3 2010 -8 0 -3 2011 16 19 30 2012 10 14 22 2013 15 18 29 2014 8 12 19 2015 13 17 26 b) b) To estimate beta, the rise over run method can be used: Beta A = (12- 9)/(8 - 4) = .75 Beta B = (26-22)/(13-10) = 1.33 A financial calculator with statistical functions can be used to perform linear regression analysis. The beta (slope) of line A is 0.79; of line B, 1.379. c. With a higher beta of 1.33, Asset B is more risky. Its return will move 1.33 times for each one point the market moves. Asset A’s return will move at a lower rate, as indicated by its beta coefficient of 0.75.

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