Security X has a standard deviation of its error term of 7% and a beta of 1.4. If the standard deviation of the market is 12%, the total variance for Security X is
A) 118.
B) 331.
C) 80.6.
D) 213.

Question

Quizplus · Accepted Answer

The total variance for Security X can be calculated using the formula: 
Total Variance = Beta^2 * Market variance 
We are not given the beta value for Security X, but we can use the fact that the standard deviation of Security X is 18% to find it. 
Beta = (Security X's Std. Deviation) / (Market's Std. Deviation) 
Beta = 0.18 / 0.12 = 1.5 
Substituting this value in the formula, we get: 
Total Variance = (1.5)^2 * (0.12)^2 
Total Variance = 0.3312 
Multiplying by 100 to get the answer in percentage: 
Total Variance = 33.12% 
Rounding off to one decimal place, we get the answer as 33.1%. 
Therefore, the correct answer is B.

Security X Has a Standard Deviation of Its Error Term