IAI Actuarial Core Principles · Economic Modelling · Capital Asset Pricing Model (CAPM)
The standard deviation of the market return is 20%. A stock has a standard deviation of 30% and a correlation of 0.6 with the market. What is the stock's beta?
Beta is 0.90. It is calculated as the correlation of 0.6 multiplied by the ratio of the stock's standard deviation to the market's standard deviation, 30% divided by 20%, which is 1.5.
- A0.40
- B0.60
- C0.90Correct
- D1.50
- 0.36
Explanation
Beta = correlation × σ_stock / σ_market = 0.6 × 30/20 = 0.90. Using 20/30 instead gives 0.40, the inverted ratio. Using the correlation alone gives 0.60, ignoring the volatility ratio.
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