Question

suppose that the risk-free rate is 5% and the market portfolio has an expected return of 12% with a volatility of 25%. dinosaurs inc. has a 24% volatility and a correlation with the market of .60. assume the capm assumptions hold. dinosaurs' beta with the market is closest to:

Answer 1

Dinosaurs Inc.'s beta with the market, calculated using CAPM, is 0.576. This represents the level of systemic risk relative to the market.

Step-by-step explanation:

The student is asking about the calculation of a stock's beta using the Capital Asset Pricing Model (CAPM), which is a concept in finance that describes the relationship between systematic risk and expected return for assets, typically stocks. To calculate Dinosaurs Inc.'s beta, we use the formula:

Beta = (Correlation of Dinosaurs Inc. with the market) * (Volatility of Dinosaurs Inc. / Volatility of the market)

Substituting the given values:

Beta = 0.60 * (24% / 25%)

Beta = 0.60 * 0.96

Beta is therefore 0.576, which is the measure of the systemic risk Dinosaurs Inc. stock has in relation to the market.