FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation
A stock has a return standard deviation of 30% and the market has a return standard deviation of 20%. The correlation between the stock and the market is 0.6. What is the stock's beta?
Beta equals correlation times the ratio of stock volatility to market volatility: 0.6 times 30/20 gives 0.90. The stock moves less than one-for-one with the market because the correlation is below one, despite its higher volatility.
- A0.40
- B0.90Correct
- C1.50
- D0.60
Explanation
Beta = correlation x (stock sd / market sd) = 0.6 x (30/20) = 0.6 x 1.5 = 0.90. Using 0.4 would come from inverting the volatility ratio (0.6 x 20/30). Using 1.50 ignores the correlation.
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