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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 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?

Question

Quizplus · Accepted Answer

A) The systematic risk of the strength of the economy produces a 30% - (-20%) = 50% change in return for the market portfolio.
The type S firm's return changes by 45% - (-30%) = 75%, so beta = 75% / 50% = 1.5

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