Question

Suppose the market follows a single index model, where the index has standard deviation of 15%. For a stock with firm-specific risk (in terms of STD) of 10% and standard deviation of 30%, what is the beta of the stock

Answer 1

Step-by-step explanation:

St deviation of stock σ = √( β² x σ₁² + σ₂² )

σ₁ = standard deviation of market = .15 and σ₂ is standard deviation of firm

Putting the values given

.30 = √ ( β² x .15² + .10² )

.09 = β² x .0225 + .01

β² x .0225 = .08

β² = 3.5555

β = 1.88