Question

Suppose that the standard deviation of returns for a single stock A is σA = 30%, and the standard deviation of the market return is σM = 10%. If the correlation between stock A and the market is rhoAM = 0.3, then the stock’s beta is . Is it reasonable to expect that the volatility of the market portfolio’s future expected returns will be greater than the volatility of stock A’s returns? Yes No

Answer 1

Answer:

The stock’s beta is 0.90

Is not reasonable to expect that the volatility of the market portfolio’s future expected returns will be greater than the volatility of stock A’s returns

Explanation:

In order to calculate the stock’s beta we would have to calculate the following formula:

Beta of stock = (standard deviation of stock A x correlation between stock A and market) / standard deviation of market

beta = (30% x 0.3) / 10% = 0.90

The market is assumed to have a beta of 0.90 and beta of a stock is the volatility of the stock in relation to the market. Since, stock A has beta equal to the market, its volatility will be correlated with the market. Therefore is not reasonable to expect that the volatility of the market portfolio’s future expected returns will be greater than the volatility of stock A’s returns