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Dear Sir,
I always make same mistake when derive the project asset beta. Appreciate if you could correct me with the rational behind.
After I find out the asset beta of the similar business Ba=0.89, why i should not straight away take the proxy co asset beta 0.89 to multiply with the % given(15%) in order to get project asset beta?
eg: Ba = 0.89 luxury transport
Be = 1.6 (15% luxury transport)
Ba = 0.80 non luxury transportThe overall asset beta is the weighted average of the individual asset betas of the two types of business.
Equity betas are higher than asset betas due to the gearing within the business.
Two things may help you. One is the free lectures on CAPM where this is dealt with.
The other is that the question you are quoting from is Question 1 from the December 2014 exam, and last week I uploaded a lecture working through this question.
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