Financial analysts have estimated the returns on shares of Drucker Corporation a

Question

Financial analysts have estimated the returns on shares of Drucker Corporation and the overall market portfolio under various economic conditions as follows. The return for Drucker in the following three economic states of nature are forecasted to be: -18% in recession, +11% in moderate growth, and +33% in a boom. Estimates for the market as a whole in the same economic states are -9% in recession, +8% in moderate growth, and +25% in boom. The analyst considers each state to be equally likely. Using these data, compute the beta of Drucker Corporation's stock. Place your answer as a number with at least three decimal places.

Explanation / Answer

As each state out of 3 states is equally likely, so each state is having probability of 1/3

Expected return for Drucker=1/3*-18%+1/3*11%+1/3*33%=8.66%

Expected return for Market=1/3*-9%+1/3*8%+1/3*25%=8%

Beta=(Return on stock-risk free rate)/(market return - risk free rate)

Here, beta=(8.66-riskfree)/(8-riskfree)

Substititue the value of risk free rate

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.