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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Community

TTanishq

0.85

4.51

0.0451

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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