Explanation

Beta (β) is calculated using the formula:

$\beta = \rho \times \frac{\sigma_p}{\sigma_b}$

Where:

• $\rho$ = correlation between portfolio and benchmark returns = 0.8
• $\sigma_p$ = volatility of portfolio returns = 5%
• $\sigma_b$ = volatility of benchmark returns = 4%

Substituting the values:

$\beta = 0.8 \times \frac{5\%}{4\%} = 0.8 \times 1.25 = 1.00$

Therefore, the beta of the portfolio is 1.00, which corresponds to option A.

Key Points:

• Beta measures the sensitivity of a portfolio's returns to benchmark returns
• A beta of 1.00 means the portfolio moves in line with the benchmark
• The formula combines correlation and relative volatilities to determine systematic risk exposure