Question

Find out the values of total risk, systematic and nonsystematic risk of stock j in variance term.

The mean of excess market return is 1.33%

The mean of excess return on asset j is 3.0%

The variance of excess market return is 2.89%

The variance of excess returns on asset j is 2.0%

The covariance of excess market returns and excess returns on asset j is 2.33%

Answer 1

The variance of excess market return is 2.89% = VARIANCE(M)

The variance of excess returns on asset j is 2.0% = VARIANCE(A)

The covariance of excess market returns and excess returns on asset j is 2.33%= COVARIANCE(M,A)

BETA OF ASSET = COVARIANCE(M,A)/ VARIANCE(M) = 2.33/2.89 = 0.8062

NOW TOTAL RISK = UNSYSTEMATIC RISK + SYSTEMATIC RISK

(I) TOTAL RISK = The variance of excess returns on asset j = 2.0% = VARIANCE(A)

(II) SYSTEMATIC RISK = (BETA⁾² *(VARIANCE(M) = (0.8062)²(2.89) = 1.8785%

(III) THEREFORE UNSYSTEMATIC RISK = TOTAL RISK - SYSTEMATIC RISK = 2.0% - 1.8785% = 0.1215%