Can we calculate beta OF STOCK A with this information;
Weights- A=1/3; B=2/3
STDEV - A=.3; B=.5
CORRELATION OF STOCK A AND B= 0.7
Is B the market or another stock? If it is already the market, then it is possible to calculate beta of stock A. Not possible otherwise.
You can calculate the beta of A with respect to B, even if B is just another stock.
Really? Isn’t it supposed the beta is respect to the market?
I’m pretty sure you can calculate the beta of any price series with respect to any other price series…although I accept the term “Beta” is usually used when referring to a stocks beta to the overall broad based market.
But when hedging using derivatives or when hedging one instrument with any other instrument, one of the steps in calculating the optimal hedge ratio is to calculate the beta between the hedging instrument and the instrument to be hedged - using the formula outlined above. The instruments involved definitely don’t need to include the broad market index.
The question doesn’t specify whether they want the stocks beta with respect to the broad market, which could be labelled “C”, whether the broad market is represented by “B”, or whether B is something else, or indeed whether they even want the beta with respect to the market or whether they just simply want the beta of A with respect to B.
Its a terribly worded question in my opinion.
Beta is a statistical idea that’s used in finance. S666 is right in that beta is typically thought of as something relative to the market, but you can really calculate it for any two series. In a regression context, beta is the coefficient, and it’s calculated the same way as the “stock vs market” beta.
beta(a,b) = cov(a,b)/var(b) where cov(a,b)= corr(a,b)*stdev(a)*stdev(b)
Note, too, that in its typical use in finance, it’s based on series of returns, not series of prices.
Yeah. I meant with my post that OP wanted the market beta of stock A. In fact, if B is another stock, he can’t calculate the market beta of A with the info provided. Am I right here?
I’m 100% aware of that, but if OP wants the market beta of stock A, and the info provided is from another stock (B in this case), can OP calculate the market beta of stock A?
I see what you’re saying. No, I don’t think he or she can unless they’re (the question writers) making some weird assumption (or that they haven’t been clear in saying B is the market).
Yup id agree with you; unless “B” is in fact the broad market, then I don’t believe the necessary info is there to calculate A’s beta with respect to the market.
You’re correct.
However, that doesn’t stop some prep providers from thinking that there is enough info there.