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Portfolio went up 5.04%, market went up 4.4%, so they conclude that effective beta is 0.0504/0.04=1.15
but is this the deffinition of beta, how much a stock goes up compared to how much the mak et goes up?
Er=rf+B(rm-rf), so if you have a beta of 2, your return should not be 2Rm, but rf+2rm-2rf …
I feel like I should not be bringing in the SML here, beta is a regression of stock returns vs market returns, so it seems what the question is doing is right, but i just forgot this stuff and not sure what is the relevance of sml now…
i would appreciate a refresh esp from an ninjaz and cps out there
^ appreciate it andrew, but maybe an explannnation from you or anyone else who can see what is it i cant comprehend.
many thanks
It think the theory here is that Er = Rfr + B(Rm - Rfr) is still being used, but this effective Beta calc is over a very short time horizon so they assume the Rfr is close enough to 0. If you assume that, the equation then becomes Er = B*Rm or B= Er/Rm. That’s my thought.
fin, that is one possibel explanation, beats the idea of ignoring this
cause somewhere else in the curriculum they do tell you that a portofolio with beta of 0 should earn rf
many things should make more sense what i go back and re read level 1 and 2 material, i think there will be a lot of eureka moments there, at least there better be for all the confussion i am having…
thanks guys