Financial Risk Manager Part 1

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Explanation:

Since the correlation or covariance between the Andromeda Fund and the S&P 500 Index is not known, CAPM must be used to back out the beta:

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

Where,
$E(R_i)$ is the expected annual return of the fund
$\beta_i$ is the beta of the fund with the market index (the S&P 500 Index)
$R_f$ is the risk-free rate per year
$E(R_M)$ is the expected annual return of the market (in this case, the S&P 500 Index)

Therefore,
$6.8\% = 2.2\% + \beta_i * (7.2\% - 2.2\%)$

Hence,
$\beta_i = (6.8\% - 2.2\%) / (7.2\% - 2.2\%) = 0.92$

Explanation:

Since the correlation or covariance between the Andromeda Fund and the S&P 500 Index is not known, CAPM must be used to back out the beta:

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

Therefore,
$6.8\% = 2.2\% + \beta_i * (7.2\% - 2.2\%)$

Hence,
$\beta_i = (6.8\% - 2.2\%) / (7.2\% - 2.2\%) = 0.92$

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Suppose the S&P 500 Index has an expected annual return of 7.2% and volatility of 8.2%. Suppose the Andromeda Fund has an expected annual return of 6.8% and volatility of 7.0% and is benchmarked against the S&P 500 Index. According to the CAPM, if the risk-free rate is 2.2% per year, what is the beta of the Andromeda Fund?

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