The beta of Andromeda Fund is calculated using the Capital Asset Pricing Model (CAPM), which is a widely used finance theory that establishes a linear relationship between the expected return of an asset and its risk as measured by beta. The beta value indicates the sensitivity of the fund's returns to the overall market returns. In this case, the formula to calculate the beta is derived from the CAPM equation:

$E(R_i) = R_f + \beta_i [E(R_m) - R_f]$

Where:

• $E(R_i)$ is the expected annual return of the fund, which is 6.8%.
• $R_f$ is the risk-free rate, which is 2.2% per year.
• $E(R_m)$ is the expected annual return of the market, represented by the S&P 500 Index, which is 7.2%.
• $\beta_i$ is the beta of the fund with respect to the market index.

Rearranging the formula to solve for $\beta_i$ gives us:

$\beta_i = \frac{E(R_i) - R_f}{E(R_m) - R_f}$

Plugging in the given values:

$\beta_i = \frac{6.8\% - 2.2\%}{7.2\% - 2.2\%}$ $\beta_i = \frac{4.6\%}{5\%}$ $\beta_i = 0.92$

Thus, the beta of Andromeda Fund is 0.92, which indicates that the fund is slightly less volatile than the market, as it is expected to be less responsive to market movements compared to the S&P 500 Index. The correct answer is A.0.92.