Question

The standard deviation of the returns on a stock is 25% and the standard deviation of...

The standard deviation of the returns on a stock is 25% and the standard deviation of the market is 20%. The risk-free rate is 6%. The beta for the stock is 0.80, and the market risk premium is 8%. According to the market model, what proportion of the stock's variance is explained by the market?

a.

64%
b.

41%
c.

20%
d.

36%
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Answer #1

Correct answer: b. 41%

Standard deviation of stock (Total Risk) = 25%

Stanadard deviation of Market = 20%

Beta of Stock =0.80

Thus,

Proportion of stock's proportion explained by market:

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