Stock A has an expected return of 12 percent and a variance of .0203. The market has an expected return of 11 percent and a variance of .0093. What is the beta of Stock A if the covariance of Stock A with the market is .0137?
Question
Stock A has an expected return of 12 percent and a variance of .0203. The market has an expected return of 11 percent and a variance of .0093. What is the beta of Stock A if the covariance of Stock A with the market is .0137?
Solution
The beta of a stock is calculated using the formula:
Beta = Covariance(Stock, Market) / Variance(Market)
Given the values in the question, we can substitute them into the formula:
Beta = .0137 / .0093
After performing the division, we get:
Beta = 1.4731
So, the beta of Stock A is approximately 1.4731. This means that Stock A is expected to perform 47.31% better than the market when the market is up, and 47.31% worse when the market is down.
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