Question
In: Finance
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)?
Solutions
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 agoRelated Solutions
If the covariance between the excess return of stock A and the market excess return is...
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Average Annual Returns
U.S. Equity Market
Period
U.S. equity
1-Month
T-Bills
Excess return
Standard
Deviation
Sharpe
Ratio
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11.77
3.38
8.34
20.36
0.41
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0.92
8.49
26.83
0.32
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14.00
3.14
10.86
17.46
0.62
1973–1995
13.38
7.26
6.11
18.43
0.33
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2.21
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18.39
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