Securities A,B,C have the following;
Sec. Exp.Ret. Beta
A 10 .7
B 14 1.2
C 20 1.8
According to CAPM, what is the correct slope between security A&B?
A&C?
The correct slope between two securities can be calculated using the beta values of the securities. The slope represents the sensitivity of one security's returns to the returns of another security.
To calculate the slope between securities A and B, you will use the formula:
Slope (A&B) = Beta of B / Beta of A
In this case, the beta of security B is 1.2 and the beta of security A is 0.7. Therefore, the slope between A and B would be:
Slope (A&B) = 1.2 / 0.7 = 1.71
So, the correct slope between security A and B is 1.71.
To calculate the slope between securities A and C, you will again use the formula:
Slope (A&C) = Beta of C / Beta of A
In this case, the beta of security C is 1.8 and the beta of security A is 0.7. Therefore, the slope between A and C would be:
Slope (A&C) = 1.8 / 0.7 = 2.57
So, the correct slope between security A and C is 2.57.