Question

RA 3% + 1.2 RM + eA RB 4% + 1.4 RM + eB Market SD...

RA 3% + 1.2 RM + eA
RB 4% + 1.4 RM + eB
Market SD 20%
R-SquareA 20%
R-SquareB 12%
Find Standard Deviation of Stock A

47.37%

50.28%

40.72%

53.67%
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Homework Answers

Answer #1

Beta = 1.2 (form the equation 3% + 1.2 RM + eA)

R-Square A = (Correlation of Stock A with the market)2

(Correlation of Stock A with the market)2 = 20%

Correlation of Stock A with the market = 0.2

Correlation of Stock A with the market = 0.4472

Beta = Correlation of Stock A with the market * ( Standard Deviation of Stock A / Standard Deviation of Market)

1.2 = 0.4472 * (Standard Deviation of Stock A / 20%)

Standard Deviation of Stock A = (1.2 * 20%) / 0.4472

Standard Deviation of Stock A = 53.67%

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