Question

The stock of a Company has a beta of 1.2 has a standard deviation of returns of 25%. The market portfolio is expected to return 12% and the risk-free rate is 2%. If the market portfolio has a standard deviation of 15%, how much of the risk of XYZ stock is market risk and how much is non-market risk?

Answer 1

Given

Beta of XYZ = 1.2

standard deviation = 25% = 0.25

return on market portfolio = 12% = 0.12

risk-free rate of return = 2% = 0.02

standard deviation of market portfolio = 15% = 0.15

market risk of XYZ = (Beta of XYZ)² * (standard deviation of market portfolio)² = (1.2)² * (15)² = 324

Total risk of XYZ = (standard deviation of returns of XYZ)² = (25)² = 625

Non-market risk = total risk of XYZ - market risk of XYZ = 625 - 324 = 301

market risk is ((324/625)*100) % of total risk = 51.84%

non-market risk is( (301/625)*100)% of total risk = 48.16%