in each of the the 2-A- The retums, variances, and covariance\'s of annual retur
ID: 2795170 • Letter: I
Question
in each of the the 2-A- The retums, variances, and covariance's of annual returns for XYZ Corp. and AST Inc. have been calculated for the period 1985-1994 (n-10). The values are: 31 .4% 23.0% 194.4 354.5 -173.8 -173.8 AST If the mean return and variance for the Market (S&P;) for the period were 8.2 percent and 161.1 respectively, and the covariance between XYZ and S& was 22.0, the beta for XYZ would have been Answer: a. b. less than zero, negative. between zero and.50. between .50 and 1.00. c. d. greater than 1.00. The expected return on the market for next period is 16 percent. The ri rate of return is 7 percent, and Alpha Company has a beta of 1.1 market risk premium is (3 m-Explanation / Answer
The answer is option d. i.e. Beta for XYZ would be greater than 1.00. This is because Beta measures the risk taken when compared to the Market portfolio or Beta is the systematic risk indicator.Clearly from the given figures we can see that the return of XYZ is 31.4% and its variance of return is 194.4. Both the mean and variance of returns earned by XYZ are greater than those of Market(S&P). Theoretically Beta(XYZ) = Expected return earned by XYZ - Expected return earned by the Market) / Standard deviation of Market return. Clearly Beta indicates how much extra return you earn per unit of addidtional risk incurred on a risky asset. Hence beta is clearly greater than 1 for XYZ.
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