Assume the CAPM is the correct asset pricing model.An asset has a standard deviation of 40% and the market has a standard deviation of 15%.What would the correlation of the asset with the market need to be if the asset were to have the same expected return as the market?

A) $ 0.150 $
B) $ 0.375 $
C) $ 0.600 $
D) $ 0.667 $

Question

Assume the CAPM is the correct asset pricing model.An asset has a standard deviation of 40% and the market has a standard deviation of 15%.What would the correlation of the asset with the market need to be if the asset were to have the same expected return as the market?

A) $ 0.150 $
B) $ 0.375 $
C) $ 0.600 $
D) $ 0.667 $

Quizplus · Accepted Answer

According to the CAPM,the risk of an asset is measured by beta,where the beta of the market is 1.Therefore,if an asset is to have the same beta as that of the market,then it must also have a beta of 1.Using equation 8.2,page 240,the beta of an asset is the calculated as follows: F1F1F1S1F1F1F10_i = F1F1F1S1F1F1F10_imF1F1F1S1F1F1F10_i/F1F1F1S1F1F1F10_m.Given that F1F1F1S1F1F1F10_i= 0.40 and F1F1F1S1F1F1F10_m= 0.15,and F1F1F1S1F1F1F10_i = 1,then solving for F1F1F1S1F1F1F10_im gives a required correlation of 0.375.

Assume the CAPM Is the Correct Asset Pricing Model 0.150 0.150 0.150

Assume the CAPM Is the Correct Asset Pricing Model $0.150$