Financial Risk Manager Part 1
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Kate Williams is a portfolio risk analyst for Hampton Funds. She is assigned to calculate the beta of Lion Inc. shares. What is its beta if the standard deviation of market returns is 19% and the covariance of Lions returns with the market return is 0.163?
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TTanishq
A
0.85
B
4.51
C
0.0451
D
2.55
Explanation:
Explanation
Beta is calculated using the formula:
[\beta = \frac{\text{Covariance of Asset's return with market return}}{\text{Variance of market returns}}]
Given:
- Covariance = 0.163
- Standard deviation of market returns = 19% = 0.19
- Variance of market returns = (Standard deviation)² = (0.19)² = 0.0361
[\beta = \frac{0.163}{0.0361} = 4.51]
Therefore, the beta of Lion Inc. shares is 4.51, which indicates that the stock is highly volatile compared to the market. A beta greater than 1 means the stock is more volatile than the market.
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