PM: computing beta question

correct, standard, question, computing

The covariance of the market returns with the stock’s returns is 0.005 and the standard deviation of the market’s returns is 0.05. What is the stock’s beta?
A) 2.0.
B) 1.0.
C) 0.1.
Your answer: C was incorrect. The correct answer was A) 2.0.
Betastock = Cov(stock,market)

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eagles_dare13

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2^#

发表于 2013-4-10 17:42 | 只看该作者

All three of these questions ask us to compute beta
—– Schweser question #88908:
we are given “Standard deviation on the stock market index: 20%” and we use .20 in the denominator
—– Schweser question #88907
we are given “standard deviation of the market returns is 32%” and we use .32^2 in the denominator
—– Schweser question #86987
we are given “The variance of the market is 0.04632” and we use the variance of the market to compute beta
*** I would be VERY grateful if somebody could explain when to use std and when to use variance in the denominator when computing the beta
Thanks

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EastCoastJ

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发表于 2013-4-10 17:43 | 只看该作者

look at my posts above.
both formulae are the same…
Formula 1: Cov / sigmaM^2 = Beta
Also-
Cov = corr*sigmastock*sigmaM
So substituting in Formula 1:
beta = cov/sigmaM^2 = corr*sigmastock*sigmaM/sigmaM^2=corr*sigmastock/sigmaM
– Formula 2.
[it is simple algebraic manipulation, and just that)
problems 1 and 2 were variants of this.

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