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Hi,
Im struggling to work through some parts of this question unfortunately.
I totally understand how we derive the Asset Beta of 0.61 but Im totally confused with how we get the Asset Beta of Hotel Services only of 0.75? Maybe I am being totally thick but I just cant grasp it?
I am hoping the Godfather of Accounting (Mr Moffat) can help me here?
Thanks in advance
If two streams with different betas are combined together, then the overall beta will be the weighted average of the individual betas, as I explain in my free lectures on CAPM.
Here we know that the overall asset beta for Coeden is 0.61, and at the moment Coeden is 60% hotel services and 40% property business.
The question also tells us the the asset beta for property business is 0.4.Therefore, if X is the beta for hotel services:
0.61 = (60% x X) + (40% x 0.4)
0.61 = (60% x X) + 0.16
60% x X = 0.61 – 0.16 = 0.45X = 0.45 / 0.6 = 0.75
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