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In question one how did examiner calculated asset beta of travel services.
We calculated asset beta of whole company and repair and maintenance asset beta was given shouldn’t we simply deduct repair maintenance beta from total asset beta to calculate asset of travel section
No – betas do not simply add up! The total asset beta is the weighted average of the individual betas.
Here we need to work backwards because we know the total beta and we know the repair and maintenance beta.
I do suggest that you watch the free lectures on CAPM because I explain about how to combine betas.
From question 1’s answer
Asset beta of travel services = [0·94 – (0·65 x 30%)]/70% = 1·06
why multiple by 30%? and why divide by 70%?
Please help to explain, thank you!
Travel services are 70% and repairs are 30%.
The beta for repairs is 0.65, the overall beta is 0.94
Therefore if B is the beta for travel services:(70% x B) + (30% x 0.65) = 0.94
70% x B = 0.94 – (30% x 0.65)
B = (0.94 – (30% x 0.65)) / 70% = 1.06
(Did you watch my free lectures as I wrote in my previous reply in this thread?)
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