Statstics/Finance Question: CAPM & Portfolio Theory

Discussion in 'General Chat' started by xavierm, Nov 22, 2011.

  1. #1
    Im working on an introductory finance question and I don't know how to get to the next step.

    Given: "ABC Inc and XYZ Inc have common shares listed on NYSE. S&P500 represents market portfolio.

    Portfolios:

    1. equal-weighted portfolio of ABC & T-bills has an annual variance of .04
    2. equal-weighted port. of S&P500 and T-bills has annual variance of .01
    3. equal-weighted port. of ABC and S&P500 has annual variance of .08

    Tbills has an expected annual return of 3%, S&P500 has expected annual return of 7%


    Calculate beta of ABC."
    ----

    from the question I know can assume that betaS&P is 1 and betaTbills is 0, which can give me betaPortfolio2.
    I can get ReturnPortfolio2 with return(tbills) and return(S&P)
    the portfolio variance rooted will give me portfolio standard devations, but I still don't know individual variances of any of the 3 assets.

    I know that betaABC = covariance(ABC,S&P)/variance(S&P)
    or I can use
    betaABC = [correlation(ABC,S&P)(std devation ABC)] / std devation S&P

    but I don't know how to get variance(ABC) or variance(S&P) given only portfolio variance and expected return. Any help is much appreciated :)
     
    Last edited: Nov 22, 2011
    xavierm, Nov 22, 2011 IP