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The annual standard deviation of returns on Stock A’s equity is 31% and the correlation coefficient of these returns, with those on the market index (S&P 500 index), is 0.82. Comparable numbers of Stock B are 34% and 0.64.
a. Which stock is riskier? Why?
b. What can you say about Stock A if its correlation coefficient is 0
c. What can you say about Stock A if its correlation coefficient is -1
d. What can you say about Stock A if its correlation coefficient is 1
e. Assume the standard deviation for the market index (S&P 500 index) is 25%, what are betas of stock A and for stock B.
f. Interpret the betas of stock A and stock B you compute in part e
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