The covariance between Amazon stock and the S&P 500 is 0.05. The standard deviation of the stock market is 20%. What is the beta of Amazon?
A)0.00
B)1.00
C)1.25
D)1.42

Question

Quizplus · Accepted Answer

Beta measures how much a stock moves in relation to the overall market. It is calculated as the covariance of the stock with the market divided by the variance of the market.

Beta = Covariance(AMZN, S&P 500) / Variance(S&P 500)

We are given that the covariance between Amazon and the S&P 500 is 0.05. We are also told that the standard deviation (which is the square root of the variance) of the S&P 500 is 20%.

So, 
Beta = 0.05 / (0.2^2) 
Beta = 1.25

Therefore, the answer is C, 1.25.

The Covariance Between Amazon Stock and the S&P 500 Is