FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation
The sample covariance between the monthly returns of Stock A and the market index is 0.00360, and the variance of the market index's monthly returns is 0.00240. What is the estimated beta of Stock A relative to the market?
Beta is the covariance of the stock with the market divided by the market variance. Dividing 0.00360 by 0.00240 gives 1.50. Inverting the ratio, which gives 0.67, is a common mistake because the market variance belongs in the denominator.
- A0.67
- B1.50Correct
- C2.40
- D0.0000086
Explanation
Beta equals Cov(A, M) divided by Var(M). Here 0.00360 / 0.00240 = 1.50. Choosing 0.67 inverts the ratio, and 2.40 comes from using a figure that is not in the correct ratio.
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