CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
A stock has a covariance with the market return of 0.0360. The market return has a standard deviation of 20%. The stock's estimated beta is closest to:
Beta equals covariance divided by market variance. The market variance is 0.20 squared, or 0.04, so beta is 0.0360 divided by 0.04, which is 0.90. Dividing by the standard deviation instead of the variance is the common error.
- A0.72
- B0.90Correct
- C1.80
Explanation
Market variance = 0.20^2 = 0.04. Beta = 0.0360/0.04 = 0.90. Using the standard deviation (0.0360/0.20 = 0.18) or the variance inverted would be wrong, and 1.80 arises from dividing by 0.02.
Did you get it right without looking?
One question tells you little. A timed set on The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models shows your real accuracy, how long you take and where you lose marks.
More The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models questions
- In an APT framework, if an asset's expected return is higher than the return implied by its factor sensitivities, arbitrageurs will most lik…
- An analyst estimates a stock's beta using a market model regression. The covariance of the stock's returns with the market's returns is 0.03…
- In the Fama-French three-factor model, the SMB factor is most accurately described as the return on a portfolio of:
- The risk-free rate is 3.0%, the expected market return is 9.0%, and a stock has a beta of 1.25. The stock's required return under the CAPM i…
- An analyst estimates a stock's beta by regressing the stock's historical returns on the returns of a market index. The beta estimate is most…
- Compared with the CAPM, multifactor models such as the Fama-French model are most likely to: