Estimating Beta Suppose the market portfolio tends to increase by 47% when the economy is strong and

QUESTION

Estimating BetaSuppose the market portfolio tends to increase by 47% when the economy is strong and decline by 25% when the economy is weak. What is the beta of a type S firm whose return is 40% on average when the economy is strong and -20% when the economy is weak? What is the beta of a type I firm that bears only idiosyncratic, firm-specific risk?
Part A Beta measure the systematic risk of the stock and is represented by a numbric value which measured as a ratio of change in stock price due to change in market benchmark index. A. Change in market index = 47% (-) 25% = 72% B. Change in stock during the same time = 40% (-) 20% = 60% Beta = B / A = 60% / 72% = 0.83 Part B Type I firm that has only firm-specific risk is unaffected by

change in market due to change in economic environment to strong or weak. Its returns are only affected by factors which are specific to the firm. Hence beta in this case is A. Change in market index = 72% B. Change in stock Type I Firm = 0% Beta = 0% / 72% = 0%.

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