CMA Final · Strategic Financial Management · Risks in Financial Market
A stock has a beta of 1.2 and its idiosyncratic variance is 0.0036. Market variance is 0.0100. What is the proportion of its total variance that is systematic risk?
Systematic risk is 80% of total variance. Beta squared times market variance gives 1.44 x 0.0100 = 0.0144; adding specific variance of 0.0036 gives 0.0180 in total, and 0.0144 divided by 0.0180 equals 80%.
- A0.0144 / 0.0180 = 80%
- B0.0120 / 0.0156 = 76.9%
- C0.0144 / 0.0156 = 92.3%Correct
- D0.0036 / 0.0180 = 20%
Explanation
Systematic variance = 1.2^2 x 0.01 = 0.0144. Total = 0.0144 + 0.0036 = 0.0180. The share is 0.0144/0.0180 = 80%. The first option is correct: so the key must be option 1.
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