If the covariance between the excess return of stock A and the market excess return is...

If the covariance between the excess return of stock A and the market excess return is 0.03, the standard deviation of the market excess return is 0.15, and the standard deviation of the excess return of stock A is 0.25, what is the idiosyncratic volatility? What fraction of the total risk (variance) comes from the systematic risk (variance)?

Expert Solution

Step 1 : Calculate the idiosyncratic volatility

The risk specifcally related to an asset or a particular investment is called idiosyncratic risk or firm related risk.

For ex : if there are floods in an area, only the firms having plants/offices in the inundated region will be affected by these floods.

Step 2: Fraction of the total risk coming from systematic risk

= Market Variance / Total Variance

= ~ 66.67%

jeff jeffy answered 1 year ago

If the covariance between the excess return of stock A and the market excess return is...

If the covariance between the excess return of stock A and the market excess return is 0.03, the standard deviation of the market excess return is 0.15, and the standard deviation of the excess return of stock A is 0.25, what is the idiosyncratic volatility? What fraction of the total risk (variance) comes from the systematic risk (variance)? Please show work.

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If the covariance between the excess return of stock A and the market excess return is...

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