Student Name : Anika Tasnim

Student ID : 1822315

SHOW
THE RELATIONSHIP
BETWEEN
Ꝋ, ß and RA
FOR Ꝋ = 10°, 45° and 70°

Home Assignment # 2 | Financial Management | MBA 511E | Autumn 2018

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Let us assume –

RF = 6%
RM = 12%

Therefore the table turns out as followed –

Ꝋ ß = tanꝊ RA = RF + ß (RM – RF)

Sl. Column
Column 2 Column 3
No. 1
1. RA = 6% + 0.17632698 (12% - 6%)
10° tan10° = 0.17632698 RA = 6% + 1.057961884%
RA = 7.057961884%
2. RA = 6% + 1 (12% - 6%)
45° tan45° = 1 RA = 6% + 6%
RA = 12%
3. RA = 6% + 2.747477419 (12% - 6%)
tan70° =
70° RA = 6% + 16.48486452%
2.747477419
RA = 22.48486452%%

Risk Characterization Line

Breakeven

45°

As we know that ß represents risk of the company compared to the market risk.
Here, in row number 1 we notice that tan<1 which is below the breakeven point so R A< RM, meaning
that with very minimum risk companies will get lower Return R A than the Average Market Return RM.

Again, in row number 2 we notice tan 45°=1 which is at breakeven point. So, we can say that at this
point RA= RM. Hence, we can say that at breakeven point Return R A is as equal to the Average Market
Return RM.

Again, in row number 3 we notice tan >1 which is above the breakeven point. So, we can say that at
this point RA>RM. As a result, we can say that with higher risk companies will get higher Return R A
than Average Market Return RM.

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So,

Comparing column 1 & 2, we see that, there is a direct relationship between Ꝋ and ß
Comparing column 1 & 3, we see that, there is a direct relationship between Ꝋ and R A
Comparing column 2 & 3, we see that, there is a direct relationship between ß and R A

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