Question

a) Consider a stock that has a covariance of returns to the market of 0.0182. The standard deviation of the market is 0.158. What is the beta of this stock? Enter your answer rounded to 2 DECIMAL PLACES.

b) The CFO of MediSearch plc believes that investing into a project which will develop a new drug for fighting the flu virus, promises a long-term annual return of 8%. The expected return of the market index is RM = 11%, the volatility of the market index is σM  = 9.3%, and the risk-free asset earns Rf  = 5.6%. The CFO has studied similar projects of other companies and believes that the covariance between the returns of this project and the returns of the market is σP,M  = 0.0097 (in decimal form).

Thank you in advance :)

Answer 1

(a)

Compute the beta of Stock, using the equation as shown below:

Beta = Covariance of asset and market/ Standard deviation²

             = 0.0182/ 0.158²

         = 0.0182/ 0.024964

         = 0.73

Hence, the beta of stock is 0.73 times.