Question

the covariance between eb corporation's common stock returns and the return on the market portfolio is 0.018. the standard deviation of the market is 0.3. what is the beta of eb corporation's common stock?

Answer 1

The beta of EB Corporation's common stock is calculated by dividing the given covariance of 0.018 by the market variance, resulting in a beta of 0.2.

Step-by-step explanation:

The beta of EB Corporation's common stock can be calculated using the formula for beta, which is the covariance between the stock's returns and the market returns divided by the variance of the market. Given the covariance of 0.018 and the standard deviation of the market portfolio, which is 0.3, the variance of the market can be calculated by squaring the standard deviation (0.32=0.09). Using these values:

Beta = Covariance / Variance of the Market

= 0.018 / 0.09

= 0.2.

Therefore, the beta of EB Corporation's common stock is 0.2. This means that for every 1% change in the market, the stock's return is expected to change by 0.2%.