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Hi Sir….can you please explain how the asset beta was calculated for the similar components, after calculating the asset beta for the whole Co and then for the other components.
To get the beta for Lisa’s new project, we use the beta from Elfu for the similar components.
We can calculate Elfu’s overall asset beta (because we know their equity beta), but this is the beta not just for the similar components but also for their other activities.
The overall beta is the weighted average of the betas for the two types of business in Elfu (similar components and other activities), and we can calculate the asset beta for other activities (because the know the equity beta for other activities).
So……the overall asset beta = (asset beta for other activities x 75%) + (asset beta for component x 25%), and so from this we can calculate the asset beta for the component, which is what we need.
(The 75% and 25% are because the question says that 75% of Elfu’s equity can be attributed to other activities, and therefore 25% is attributable fo the special component).
Please do watch my lectures on CAPM, because I do explain about weighting the betas in my lectures, and it is a common exercise needed in the exam.
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