Question

Compute the beta of risky stock ABC. Here is its data: this stock quotes in the US. Its variance is 0.022. The covariance of ABC with the US market portfolio is 0.21, and its covariance with the risk-free asset is 0.0. The US market portfolio volatility is 14%. The beta is,

Select one:

a. 2.75

b. 15.50

c. None of the above.

d. No answer

e. Imposible to compute, not enough data.

Answer 1

The formula for Beta of a stock is = (Covariance of stock and market portfolio) / variance of market portfolio

Volatility is usually Standard Deviation. So As volatility of market portfolio is given, so we need to square it up in order to find the variance of market portfolio

Variance of Market Portfolio = (Volatility of Market Portfolio)^2

= (14%)^2

= 196 (%)^2

Beta of the stock = 0.21 / 196 (%)^2

10.7142

The beta of the stock should be 10.7142 . Correct option is "C"

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