The covariance between Costco stock and the S&P 500 is 0.35. The standard deviation of the stock market is 20%. What is the beta of Costco?Group of answer choices8.500.008.928.75
Question
The covariance between Costco stock and the S&P 500 is 0.35. The standard deviation of the stock market is 20%. What is the beta of Costco?Group of answer choices8.500.008.928.75
Solution
The beta of a stock is calculated by dividing the covariance of the stock with the market by the variance of the market. The variance of the market is the square of the standard deviation of the market.
Given: Covariance (Costco, S&P 500) = 0.35 Standard deviation of the market (S&P 500) = 20% = 0.20
First, calculate the variance of the market: Variance = (Standard deviation)^2 Variance = (0.20)^2 = 0.04
Then, calculate the beta of Costco: Beta = Covariance / Variance Beta = 0.35 / 0.04 = 8.75
So, the beta of Costco is 8.75.
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