An asset has a beta of 1.20. The variance of returns on a market index, $\sigma _ { m } ^ { 2 }$ is 225. If the variance of returns for the asset is 400, what proportion of the asset's total risk is systematic, and what proportion is residual risk?

Question

Quizplus · Accepted Answer

The Answer is

\bullet

The total risk of the asset is 400 (a

\sigma

of 20%).

\bullet

Systematic risk =1.2²(225) = 324%.
Thus, the portion of total risk that can be attributed to market risk is 324/400 = 81%. The balance, 19%, can be attributed to asset specific risk.

An Asset Has a Beta of 1 σm2\sigma _ { m } ^ { 2 }σm2​

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