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Answer: 0.85
A is correct. Since the correlation or covariance between the Alpha Industrial Fund and the Russell 2000 Index is not known, CAPM must be used to back out the beta: E(Ri) = Rp + βi[E(Rm) - RF] where E(Ri) is the expected annual return of the fund, βi is the beta of the fund with the market index (the Russell 2000 Index), Rf is the risk-free rate per year, E(Rm) is the expected annual return of the market (in this case, the Russell 2000 Index). Therefore 7.1% = 3.2% + βi *(7.8% - 3.2%) Hence, βi = (7.1% - 3.2%)/(7.8% - 3.2%) = 0.85
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A manager of an endowment fund is evaluating the market risk linked to the Alpha Industrial Fund. The Alpha Industrial Fund is projected to deliver an annual return of 7.1% and exhibits a volatility of 7.9%. The fund uses the Russell 2000 Index as its benchmark. The expected annual return of the Russell 2000 Index has been estimated at 7.8%, accompanied by a volatility of 9.8%. The task is to determine the beta coefficient of the Alpha Industrial Fund using the Capital Asset Pricing Model (CAPM), with the risk-free rate assumed to be 3.2% per annum.
A
0.85
B
0.95
C
1.13
D
1.23
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