FRM Part II · FRM Exam Part II · Factors
A stock has annualized volatility of 30%, the market has annualized volatility of 20%, and their correlation is 0.60. What is the stock's CAPM beta, and what fraction of its variance is systematic?
Beta is 0.90 and 36% of the variance is systematic. Beta equals correlation times the ratio of stock to market volatility, 0.60 × 1.5 × ... specifically 0.60 × 30/20. The systematic share of variance is the squared correlation, 0.36.
- ABeta 0.90; systematic fraction 36%Correct
- BBeta 0.90; systematic fraction 60%
- CBeta 0.40; systematic fraction 36%
- DBeta 1.50; systematic fraction 60%
Explanation
Beta = ρ × σi/σm = 0.60 × 30/20 = 0.90. Systematic fraction of variance equals R² = ρ² = 0.36. Using 0.60 as the fraction confuses correlation with R-squared.
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