CFA CFA Level 1 Level 1 candidate – can somebody suggest an answer for Q1 part 1? Im sure its easy :(

Level 1 candidate – can somebody suggest an answer for Q1 part 1? Im sure its easy :(

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  • Vanquish81
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    Vanquish81
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    Vanquish81
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    Also can somebody suggest how to work out Beta if you are not given the market standard deviation?

    rsparks
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    on my lunch break, so not giving this 100%, but one way to calc beta:

    Beta = Corr(Asset,Market) * [Sd(Asset) / Sd(Market)]

    .6 = .5 * [ .016 / Sd(Market)]

    This will give you the market  Sd, but you need to calculate the Beta for each stock  (particularly Stock Y) for the CAPM right?

    Vanquish81
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    Hi thanks a lot for the reply. Missed the whole reverse engineering to get market SD.

    So from above marketSD = (.5*.016)/.6, so marketSD = 1.3%?? I can work out the beta for stock Y from this now.

    However Im still a little unsure about part 1. Im taking it that expected return is weighting*variance??

    So for stock X that would be .5*(.016)². However for stock Y we are not given its SD to work out the variance?

    Yeshank
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    You can Easily calculate E(r) for Stock X –

    2 + 0.6 (8-2)

    Now for Stock Y you first have to calculate Market Sd.. which we know how thanks to rsparks…..but we do not know the Sd of Stock Y itself….But since we are given Sd of X , Covariance bw X and Y , and Correlation bw X and Y we can easily calculate that too!

    Correation xy = Covariance xy / sd x * sd y

    Just put in the number and you have got sd of stock y!!

    Vanquish81
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    Hi, sorry for the late reply but thank you to all above for the explanation. Helped me pass!

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