Measuring Systematic Risk Chapter 7 Finance

7.9 Measuring Systematic Risk: Describe and justify what the value of the beta of a U.S. Treasury bill should be. Solution: Since the beta of any asset is the slope of the line of best fit for the plot of an asset against that of the market return, then we can use that logic to help us understand the beta of a T- bill. If we purchased a T-bill five years ago and held the same T-bill through each of the last 60 months then the return for each of those 60 months would be exactly the same. Therefore, the vertical axis coordinates of each of the monthly returns would have the same value and therefore the slope (beta) of the line of best fit would be zero. The meaning of a beta of zero means that our T-bill has no systematic risk. That is logical given that we know that a T-bill has no risk at all since it is a riskless asset. 7.10 Measuring Systematic Risk: If the expected rate of return for the market is not much greater than the risk-free rate of return, what is the general level of compensation for bearing systematic risk? Solution: Such a situation suggests that return compensation for investing in an asset is determined largely by the risk-free return than by the market’s compensation for bearing systematic risk. This means that the price for bearing systematic risk is very low. This may be