CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
An asset has a standard deviation of returns of 24%, the market portfolio has a standard deviation of 16%, and the correlation between the asset and the market is 0.60. The asset's beta is closest to:
Beta is about 0.90. It equals the correlation times the ratio of the asset's standard deviation to the market's: 0.60 × 24/16 = 0.90. Using only the volatility ratio would give 1.50, which ignores that the asset's correlation with the market is below one.
- A0.40
- B0.90Correct
- C1.50
Explanation
Beta = correlation × (asset SD / market SD) = 0.60 × (24/16) = 0.60 × 1.5 = 0.90. The 1.50 option omits the correlation, using only the ratio of standard deviations. The 0.40 option inverts the ratio (0.60 × 16/24).
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