Asked by Huyen Nguyen on May 01, 2024
Verified
Port Company is financed entirely by equity and has three divisions. Division A is the stable products division, and has a beta of 0.8. Division B takes only projects with the same risk as the market portfolio. Division C is the research and development division, where the average beta of projects taken is 1.6. The firm's assets are divided equally (both in terms of market value and book value) among the three divisions. What is the beta of the firm?
A) 0.80
B) 1.00
C) 1.03
D) 1.13
E) 1.33
Beta
A measure of a stock's volatility in relation to the overall market; used in the capital asset pricing model.
Equity
The amount of ownership an investor has in an asset or company, typically represented by shares.
Divisions
Subsets within a company that focus on specific operational areas or markets.
- Understand the beta coefficient as an indicator of a stock or portfolio's volatility compared to the overall market, including how it is calculated for different portfolio situations.
Verified Answer
ZK
Zybrea KnightMay 05, 2024
Final Answer :
D
Explanation :
The beta of the firm can be calculated as the weighted average of the betas of its divisions. Since the firm's assets are divided equally among the three divisions, each division contributes equally to the firm's overall beta. Therefore, the firm's beta is the average of the three divisional betas: (0.8 + 1.0 + 1.6) / 3 = 1.13.
Learning Objectives
- Understand the beta coefficient as an indicator of a stock or portfolio's volatility compared to the overall market, including how it is calculated for different portfolio situations.
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