Use the following information to answer the question(s)below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The beta for Taggart Transcontinental is closest to:
A)0.75.
B)0.80.
C)1.00.
D)1.10.

Question

Use the following information to answer the question(s)below.  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The beta for Taggart Transcontinental is closest to:
A)0.75. 
B)0.80. 
C)1.00. 
D)1.10.

Quizplus · Accepted Answer

The beta for Taggart Transcontinental can be calculated using the following formula: 
Beta = Covariance(Taggart, Market) / Variance(Market)

Since Taggart's beta is being asked, we don't have a specific covariance value, but we can use the market beta as a proxy.

Market beta = 1 (by definition)

Taggart beta = Covariance(Taggart, Market) / Variance(Market)
             = (Taggart's correlation with the Market) x (Taggart's standard deviation) ÷ (Market standard deviation)

We don't know the correlation or the standard deviation of Taggart, but we can guess that it's likely positively correlated with the market and has a similar risk level, so we can assume the correlation is close to 1 and the standard deviation is close to the market's.

Therefore,
Taggart beta ≈ 1 x 10% ÷ 10%
                    ≈ 1

So the answer is C) 1.00.

Use the Following Information to Answer the Question(s)below