Question

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 12% with a volatility of 25%. Dinosaurs Inc. has a 24% volatility and a correlation with the market of 60 . Assume the CAPM assumptions hold. Dinosaurs' beta with the market is closest to: \begin{tabular}{c} 0.58 \\ \hline 0.72 \\ \hline 1.04 \\ \hline 0.63 \\ \hline 0.96 \end{tabular}

Answer 1

To calculate the beta of Dinosaurs Inc., you need to calculate the covariance and variance using the provided information. The beta is approximately 0.35.

Step-by-step explanation:

To calculate the beta of Dinosaurs Inc., we use the formula:

Beta = Covariance (Dinosaurs Inc., Market) / Variance (Market)

Given that the market volatility is 25%, we can calculate the market variance as 0.25^2 = 0.0625.
Next, we calculate the covariance between Dinosaurs Inc. and the market:

Covariance = Correlation x Volatility (Dinosaurs Inc.) x Volatility (Market)
Covariance = 60% x 24% x 25% = 0.36 x 0.24 x 0.25 = 0.0216

Finally, we calculate the beta:
Beta = Covariance / Variance = 0.0216 / 0.0625 = 0.3456

The closest value to this is 0.35, so Dinosaurs Inc.'s beta with the market is approximately 0.35.