CAPM, Capital asset pricing model.

ebayissues

Good day all,
I'm having an exam in 2days time and i am going over some questions on the CAPM, Capital asset pricing model.

I know the basic stuff like E(R) = RF+ B(Rm - Rf)

But when it comes to the complicated stuff like variance coefficient and standard deviation I just cant grasp it.

for example here's a mcq thats keeping me awake,


If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10% and that of stock B is 20%, what is the correlation coefficient between the two securities?
A. –0.50
B. +0.50
C. –1.00
D. +0.75
E. None of the above.


The correlation coefficient between stock A and the market portfolio is +0.60. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. What is the beta of the stock?
A. 0.90.
B. 1.50
C. 0.40
D. 0.25
E. None of the above.

how can I solve the above,

thanks

soddy1979

Question 1

Correlation (A,B) = Cov (A,B)/s(A)s(B) = 100/(10*20) = 100/200 = 0.5, so B

Question 2

Beta = Covariance (A,Market)/Variance (Market)

Covariance (A,Market) = Correlation (A,Market)*s(A)*s(market)

0.60*30*20 = 360

Variance Market = s(market) squared

= 20*20 = 400

Beta = 360/400 = 0.9, so A

ebayissues

soddy1979 wrote: »

Question 2

Beta = Covariance (A,Market)/Variance (Market)

Covariance (A,Market) = Correlation (A,Market)*s(A)*s(market)

0.60*30*20 = 360

Variance Market = s(market) squared

= 20*20 = 400

Beta = 360/400 = 0.9, so A

I actually thought the beta was 3./.2 = 1.5

I knew the formula but I did not grasp the concept of multiplying the correlation by the standard deviation and market portfolio.

cheers