The historical returns for the past three years for Stock B and the stock market portfolio are: Stock B: 24%,0%,24%; Market portfolio: 10%,12%,20%.Calculate the beta for Stock B.

Question

Quizplus · Accepted Answer

Beta measures the volatility of a stock relative to the market. The formula for beta is:Beta = (Covariance of stock returns and market returns) / (Variance of market returns)In this case, the covariance of stock returns and market returns is:(24% - 10%) * (10% - 12%) + (0% - 12%) * (12% - 20%) + (24% - 20%) * (20% - 12%) = 12%The variance of market returns is:(10% - 12%)^2 + (12% - 20%)^2 + (20% - 12%)^2 = 56%Therefore, the beta for Stock B is:Beta = 12% / 56% = 0.86

The Historical Returns for the Past Three Years for Stock