 # 2006 Exam question on PMgt

I the CFAI book on PMgt p 521. The analyst builds a protfolio of equally weighted stocks to proxy for a new IPO. Then he gets: Average return: 0.0051 Variance:0.0033 Covariance with market: 0.0015 Correlation with market: 0.567 The question: what is the beta: A. 0.40 B. 0.45 C. 0.57 D. 0.71 I thought the answer is C looking at the correl, but they calc beta as COV/ VARiance and get answer D. I agree with their answer as well, but why C is wrong? I see them as expressing beta. Also for equally weighted port the BETAportf = Wi* BETAi

because beta is NOT correlation… beta by definition is b= cov(i.m)/var(m) beta = additive

corr = cov(i.a) / [std(i)*std(a)]

find the beta of the market first…by using the formula to find its standard deviation so u use (corr = cov(i.a) / [std(i)*std(a)]) and then from there once u get the std deviation of the market u can calculate get the beta of the stock with b= cov(i.m)/var(m)

ahmad, beta of market is always 1. you just need to plot in the #s. the question gives you all the information like var(m)=0.0021 (not shown above in first post)

Beta can also be broken down to: Correlation(I,M) X SD(I) / SD(m)