The market index and a portfolio have a correlation coefficient of .6. What percentage of the portfolio’s total risk is systematic and what percentage is unsystematic? A) 60% 40%. B) 36% 64%. C) 40% 60%. D) 64% 36%. Whats is % of total risk?
.6 = correlation coefficient rhoi,m so if we looked at calculating beta for i beta = covi,m / sigma m^2 or beta = rho i,m * sigma i / sigma m beta is a measure of the systematic risk --> that which cannot be diversified away. Only systematic risk will remain. So given beta corresponds to the 60% – I would say A. Systematic: 60% Unsystematic: 40% ???
i would have guessed A also.
The ans is B; here is the explanation R^2 is the % of total risk that is explained by the market, systematic. So, 1- R2 would be the unsystematic risk. (.6)2 = .36 or 36%. Any clues?
Isn’t that self-explanatory? R^2 is the percentage of the variability in the dependent variable explained by the independent variable.
i think the explanation is not complete. correlation = r^2 not r*2. JDV you are right, and thats why i though 60% is explained by the market so 100%-60% = 40%, that would make it A imo. where is this bogey question from?
So, what’s the answer?
It’s B. R^2 is the % of variability explained by the market variability.
Tks Joey.