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#1

why is correlation included to solve the problem? I cant see anything in the notes when we multiply the two terms x correlation?

Beta (i,M) = covariance(i, M)/variance(M) = 24%*15%*0.70/15%^2 = 1.12 <<- must know all of these steps! CAPM: E[R(i)] = Rf + Beta (i,M)*[R(M) - Rf] = 3% + 1.12*(8%-3%) = 8.60% PV (annual compounding) = $100/(1.086) + $100/(1.086)^2 = $176.87

thanks james

Beta (i,M) = covariance(i, M)/variance(M) = 24%*15%*0.70/15%^2 = 1.12 <<- must know all of these steps! CAPM: E[R(i)] = Rf + Beta (i,M)*[R(M) - Rf] = 3% + 1.12*(8%-3%) = 8.60% PV (annual compounding) = $100/(1.086) + $100/(1.086)^2 = $176.87

thanks james

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