Answer the following questions assuming the single index mod

Answer the following questions assuming the single index model holds. A: Assume the correlation coeffecient between a stock, XYZ, and the market index is 0.70. What percentage of XYZ\'s total risk is firm specific? B: beth beta and standard deviation are measures of risk. How do these two measures differ? Specifically what type(s) of risk does each statistic capture?

Solution

The correlation coefficient is 0.70.

Then the required percentage is:

= 100 x (1.45+1.25)/4 = 100 x 2.7/4 = 25 x 2.7 = 67.5%