Question

Please ANSWER ASAP! Thank you!!!

CALCULATE the volatility of the returns for Novel Corp. stock based on the following data:

-The correlation of returns on Novel Corp to returns on the stock market is .6.

-The expected return on shares of Novel Corp is 8%.

-Risk-free rate is 2%.

-The expected return of the market is 6%.

-The volatility of the stock market’s returns is 14%.

Answer 1

Given that correlation between market and Novel corp is 0.6. Expected return on shares of Novel corp is 8%.

Using CAPM model, expected return= r(f)+ Beta*((r(m)-r(f)). So, 8%= 2%+Beta*(6%-2%). This gives Beta= 1.5

We know that Beta= (correlation between market and stock)*(sd of stock/sd of market). As volatility of market is 14%, sd of market will be square root of 14%= 0.374 On substituting, we get 1.5= 0.6*(sd of stock/0.374). So, sd of stock is 0.9354. We know that volatility is standard deviation^2. So, 0.9354^2= 0.875

So, volatility of the returns for Novel corp. stock is 0.875