Question

6. Calculating a beta coefficient for a single stock Suppose that the standard deviation of returns for a single stock A IS A = 25%, and the standard deviation of the market return is on = 15%. If the correlation between stock A and the market is PAM - 0.6, then the stock's beta is prns against the market returns will equal the true value of Is it reasonable to expect that the beta value estimated via the regression of stock stock A's beta? 0.36 No 0.04 Yes 1.67 Next, consider a two-asset portfolio consisting of stock A with WA - 80% and an expected return A - 15% and a standard deviation of A - 11%, and stock B with PR - 7% and 8%. Assuming that the correlation between stocks A and B is PAR -0.15, the expected return to the portfolio is , and the portfolio's standard deviation is . 1, instead of PAR -0.15. Which of the following statements correctly reflects the new Suppose that the correlation between stocks A and B is PAB data? The expected return to the portfolio is lower. The expected return to the portfolio is higher. The risk associated with the portfolio is lower. The risk associated with the portfolio is higher.

Answer 1

1. Stock beta = Correlation * ( σA /    σM) = 0.6 *(0.25 / 0.15) = 1

Option ,1

2. Expected return = Wa * Ra + Wb * Rb = 0.8 *0.15 + 0.2 * 0.07 =13.40

Standard deviation = [(0.8)2 (0.11)2 +(0.2) 2 (0.08) 2 + 2(0.8)(0.2)(0.11)(0.08)(-0.15)] 1/2 = 8.71

3. The risk associated with the portfolio is higher.