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Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Monsters Inc.has a 24% volatility and a correlation with the market of .60,while California Gold Mining has a 32% volatility and a correlation with the market of -.7.Assume the CAPM assumptions hold.
-California Gold Mining's beta with the market is closest to:
A)0.9.
B)1.25.
C)-0.9.
D)-1.24.

Question

Quizplus · Accepted Answer

First, we need to find the betas for each stock using the following formula:
Beta = (correlation with market * stock's volatility) / market volatility

For Monsters Inc.: 
Beta = (.60 * .24) / .18 = .8

For California Gold Mining: 
Beta = (-.7 * .32) / .18 = -1.24

Therefore, the closest option is D) -1.24.

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