l Turk Telekom11:27ni %40bartleby.comשיגסרב/ Finance / Q&A Library / Finance Questione Questionactually been 0%. What would the new beta be, based on the mostrecent 11 years of data (i.e., Years 2 through 12)? Does this beta seemreasonable-that is, is the change in beta consistent with the otherfacts given in the problem?BETA COEFFICIENTS AND RATES OF RETURN You are given the followingset of data:8A-17Historical Rates of Return (r)Stock Y(F,)NYSE (r.)Year13.0%4.0%18.214.339.119.04(6.0)(14.7)(15.3)(26.5)33.137.276.123.88.3.2(7.2)14.86.61024.120.51118.030.6Mean9.8%9.8%13.819.6a. Construct a scatter diagram graph (on graph paper) showing the rela-tionship between returns on Stock Y and the market, as shown in l Turk Telekom11:27ni %40 4A bartleby.comance / Q&A Library / Finance QuestionuestionFigure 8A.1; then draw a freehand approximation of the regressionline. What is the approximate value of the beta coefficient? (If you havea calculator with statistical functions, use it to calculate beta.)b. Give a verbal interpretation of what the regression line and the betacoefficient show about Stock Y's volatility and relative riskiness ascompared with other stocks.c. Suppose the scatter of points had been more spread out, but theregression line was exactly where your present graph shows it. Howwould this affect (1) the firm's risk if the stock were held in a one-asset portfolio and (2) the actual risk premium on the stock if theCAPM held exactly? How would the degree of scatter (or the correla-tion coefficient) affect your confidence that the calculated beta willhold true in the years ahead?d. Suppose the regression line had been downward sloping and the betacoefficient had been negative. What would this imply about (1) StockY's relative riskiness and (2) its probable risk premium?Construct an illustrative probability distribution graph of returns (seeFigure 8.3) for portfolios consisting of (1) only Stock Y, (2) 1% eachof 100 stocks with beta coefficients similar to that of Stock Y, and (3)all stocks (i.e., the distribution of returns on the market). Use as theexpected rate of return the arithmetic mean as given previously forboth Stock Y and the market, and assume that the distributions arenormal. Are the expected returns "reasonable"; that is, is it reasonablethat f, = fM = 9.8%?е.f. Now, suppose that in the next year, Year 12, the market return was27%, but Firm Y increased its use of debt, which raised its perceivedrisk to investors. Do you think that the return on Stock Y in Year 12could be approximated by this historical characteristic line?î, = 3.8% + 0.62(r,) = 3.8% + 0.62(27%) = 20.5%g. Now, suppose r, in Year 12, after the debt ratio was increased, hadactually been 0%. What would the new beta be, based on the mostrecent 11 years of data (i.e., Years 2 through 12)? Does this beta seemreasonable-that is, is the change in beta consistent with the otherfacts given in the problem?

Question

l Turk Telekom11:27ni %40bartleby.comשיגסרב/ Finance / Q&A Library / Finance Questione Questionactually been 0%. What would the new beta be, based on the mostrecent 11 years of data (i.e., Years 2 through 12)? Does this beta seemreasonable-that is, is the change in beta consistent with the otherfacts given in the problem?BETA COEFFICIENTS AND RATES OF RETURN You are given the followingset of data:8A-17Historical Rates of Return (r)Stock Y(F,)NYSE (r.)Year13.0%4.0%18.214.339.119.04(6.0)(14.7)(15.3)(26.5)33.137.276.123.88.3.2(7.2)14.86.61024.120.51118.030.6Mean9.8%9.8%13.819.6a. Construct a scatter diagram graph (on graph paper) showing the rela-tionship between returns on Stock Y and the market, as shown in l Turk Telekom11:27ni %40 4A bartleby.comance / Q&A Library / Finance QuestionuestionFigure 8A.1; then draw a freehand approximation of the regressionline. What is the approximate value of the beta coefficient? (If you havea calculator with statistical functions, use it to calculate beta.)b. Give a verbal interpretation of what the regression line and the betacoefficient show about Stock Y's volatility and relative riskiness ascompared with other stocks.c. Suppose the scatter of points had been more spread out, but theregression line was exactly where your present graph shows it. Howwould this affect (1) the firm's risk if the stock were held in a one-asset portfolio and (2) the actual risk premium on the stock if theCAPM held exactly? How would the degree of scatter (or the correla-tion coefficient) affect your confidence that the calculated beta willhold true in the years ahead?d. Suppose the regression line had been downward sloping and the betacoefficient had been negative. What would this imply about (1) StockY's relative riskiness and (2) its probable risk premium?Construct an illustrative probability distribution graph of returns (seeFigure 8.3) for portfolios consisting of (1) only Stock Y, (2) 1% eachof 100 stocks with beta coefficients similar to that of Stock Y, and (3)all stocks (i.e., the distribution of returns on the market). Use as theexpected rate of return the arithmetic mean as given previously forboth Stock Y and the market, and assume that the distributions arenormal. Are the expected returns &#34;reasonable&#34;; that is, is it reasonablethat f, = fM = 9.8%?е.f. Now, suppose that in the next year, Year 12, the market return was27%, but Firm Y increased its use of debt, which raised its perceivedrisk to investors. Do you think that the return on Stock Y in Year 12could be approximated by this historical characteristic line?î, = 3.8% + 0.62(r,) = 3.8% + 0.62(27%) = 20.5%g. Now, suppose r, in Year 12, after the debt ratio was increased, hadactually been 0%. What would the new beta be, based on the mostrecent 11 years of data (i.e., Years 2 through 12)? Does this beta seemreasonable-that is, is the change in beta consistent with the otherfacts given in the problem?

Accepted Answer

Beta of stock is used to measure the risk. It compares the movement of a stock with the movement of…