7 Questions
What is the value of the beta of security i, βi?
$0.3$
What is the estimate of the covariance between RTF and KIU?
$0.0405$
Based on the capital asset pricing model (CAPM), is JKU overvalued, under or fairly valued?
Undervalued
Which of the following is the correct formula for calculating the beta of a security, $\beta_i$?
$\beta_i = \frac{\text{Cov}(R_i,R_m)}{\text{Var}(R_m)}$
What is the formula for the covariance between two stocks, $\text{Cov}(R_{RTF}, R_{KIU})$?
$\text{Cov}(R_{RTF}, R_{KIU}) = \rho_{RTF,KIU} \sqrt{\text{Var}(R_{RTF})\text{Var}(R_{KIU})}$
What is the relationship between the correlation coefficient $\rho_{i,m}$ and the beta $\beta_i$ of a security?
$\beta_i = \rho_{i,m} \times \frac{\sigma_i}{\sigma_m}$
If the expected return of the market is 12% and the risk-free rate is 5%, what must the expected return of JKU be for it to be fairly valued according to the CAPM?
12%
Test your knowledge on calculating beta of a security based on stock market index and security returns. Practice calculating covariance, correlation coefficient, and standard deviation of market returns.
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