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Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak.A type S firm has excess returns that increase by 45% when the economy is strong and decrease by 30% when the economy is weak.A type I firm will also have excess returns of either 45% or -30%,but the type I firm's excess returns will depend only upon firm-specific events and will be completely independent of the state of the economy.
-What is the Beta for a type S firm?
A)1.5
B)0.0
C)1.0
D)0.75

Question

Quizplus · Accepted Answer

The beta for a type S firm is 1.5 because its excess returns increase by 45% when the economy is strong and decrease by 30% when the economy is weak. This means that the type S firm's excess returns are 1.5 times as volatile as the market portfolio's excess returns.

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