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Question 1

“What is Beta when

• Correlation Coefficient of the stock and the market is 0.5
• Ratio of standard deviation of stock to the standard deviation of the market is 2”

Answer 1

This is to find out if you understand that Beta is not correlation, but volatility. In a more theoretical sense, Beta = Cov (Stock, Market) / Var (Market).

Cover = Corr * Std A * Std B = Corr * Std (Stock) * Std (Market)
Beta = Corr * Std (Stock) * Std (Market) / Var (Market)
= Corr * Std (Stock) / Std (Market)
= 0.5 * 2 = 1