Answer-first summary for fast verification
Answer: 0.92
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, \[\beta_i = (6.8\% - 2.2\%) / (7.2\% - 2.2\%) = 0.92\]
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
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?
A
0.92
B
0.95
C
1.13
D
1.23
No comments yet.