CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
A stock has a correlation of 0.60 with the market. The stock's return standard deviation is 30% and the market's is 20%. The stock's beta is closest to:
Beta equals the correlation times the ratio of the stock's standard deviation to the market's. That is 0.60 times 30 divided by 20, or 0.90. Inverting the ratio gives 0.40, and ignoring correlation gives 1.50, both wrong.
- A0.40
- B0.90Correct
- C1.50
Explanation
Beta = correlation x (σ_stock/σ_market) = 0.60 x (30/20) = 0.60 x 1.5 = 0.90. Using 0.60 x 0.667 = 0.40 inverts the ratio. 1.50 ignores the correlation.
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