Explanation
The beta of an asset is calculated using the formula:
Ξ²=ΟΓΟmarketβΟassetββ
Where:
- Ο = correlation coefficient between asset and market returns = 0.7
- Οassetβ = standard deviation of asset returns = 10%
- Οmarketβ = standard deviation of market returns = 14%
Substituting the values:
Ξ²=0.7Γ14%10%β=0.7Γ0.7143=0.5
Therefore, the beta of the asset is 0.5.
Key Points:
- Beta measures the sensitivity of an asset's returns to market returns
- A beta of 0.5 means the asset is half as volatile as the market
- This calculation is fundamental in the Capital Asset Pricing Model (CAPM)