What is the stock's beta?

How to calculate Beta and required Returns for stocks?

• Given Expected return for the market 14% Standard deviation of market return 20% Risk free rate 7% Coorelation coefficient between Stock A and the market 0.7 Stock B and the market 0.4 Standard deviation for stock A 25% Standard deviation for stock B 30% a) Calculate the beta for stock A and B b) Calculate the required return for each stock Thank you for taking the time to looking at my question, I really appreciate it.

• Answer:

  Beta = (Covariance of Stock return and Market return)/Variance of Market return. Covariance = Correlation x Standard deviation of Stock x Standard deviation of Market. Required return of stock = Risk free rate + Beta(Return premium). Cov of Stock A = 0.7 x 0.25 x 0.2 = 0.035 Beta of Stock A = 0.035 / 0.2^2 = 0.875 Required return of Stock A = 7 + 0.875(7) = 13.125% Cov of Stock B = 0.4 x 0.3 x 0.2 = 0.024 Beta of Stock A = 0.024 / 0.2^2 = 0.6 Required return of Stock A = 7 + 0.6(7) = 11.2%