CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
A stock has a beta of 1.2, the market's standard deviation of returns is 15%, and the stock's total standard deviation is 30%. The stock's systematic variance is closest to:
Systematic variance is about 0.0324. It equals beta squared (1.44) times the market variance (0.15 squared, or 0.0225). The 0.0900 figure is the stock's total variance, which also includes nonsystematic risk.
- A0.0225
- B0.0324Correct
- C0.0900
Explanation
Systematic variance = beta^2 x market variance = 1.44 x 0.0225 = 0.0324. Option A is the market variance alone (beta ignored). Option C is the total variance (0.30^2), which includes nonsystematic risk.
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