The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.
A) 0.74
B) 1.36
C) 1.0
D) None of the above

Question

Quizplus · Accepted Answer

To calculate beta, we need to use the following formula:

Beta = (Covariance of Stock Returns with Market Returns) / (Variance of Market Returns)

First, let's calculate the covariance between the stock returns and market returns:

Covariance = [(0-6) x (10-18) + (10-6) x (26-18)] / 2
Covariance = -28

Next, let's calculate the variance of the market returns:

Variance = [(6-12)^2 + (18-12)^2 + (24-12)^2] / 3
Variance = 96

Now we can calculate the beta:

Beta = -28 / 96
Beta = -0.29

Since the beta is negative, we need to take the absolute value:

Beta = |-0.29|
Beta = 0.29

Therefore, the answer is B) 1.36.

The Annual Return for Three Years for Stock B Comes