Soln to H7 - H AAS S CHOOL OF B USINESS UGBA 103 U...

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Unformatted text preview: H AAS S CHOOL OF B USINESS UGBA 103 U NIVERSITY OF C ALIFORNIA AT B ERKELEY A VINASH V ERMA S OLUTION TO H OMEWORK 7 1. The beta between returns on the stock of XYZ corporation and those on the market portfolio is 1.25. The standard deviation of returns on the stock of XYZ corporation is one and a half times as much as the standard deviation of returns on the market portfolio. What percentage of the total risk of the stock of XYZ corporation can be diversified away? What is the R-squared? We are given that β XYZ = 1.25, and that σ XYZ = 1.5* σ M σ M = (2/3)* σ XYZ . The percentage diversifiable risk is given by 1 – ( β XYZ 2 * σ M 2 )/ σ XYZ 2 . = 1 – (1.25*2/3) 2 = 30.5556%. R- squared is ( β XYZ 2 * σ M 2 )/ σ XYZ 2 . = 69.4444%. 2. The variance of returns on the stock of ABC Inc. is 0.0225. The returns on ABC are not correlated with those on the market portfolio. What proportion of the total risk of ABC is diversifiable?...
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This note was uploaded on 02/12/2012 for the course UGBA 101A taught by Professor Mccullough during the Spring '08 term at Berkeley.

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