Q 8.11. Let's check that the beta combination formula (Formula 8.6 on page 211) is correct. Start
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Q 8.11. Let's check that the beta combination formula (Formula 8.6 on page 211) is correct. Start with the BCC line in the table on Page 211 1. Write down a table with the de-meaned market rate of return and de-meaned BCC rate of return in each of the four possible states. 2. Multiply the de-meaned rates of return in each scenario. This gives you four cross-products, each having units of % %. 3. Compute the average of these cross-products. This is the covariance between BCC and M. 4. Divide the covariance between BCC and M by the variance of the market. 5. Which is faster-this route or Formula 8.6? Which is faster if there are a hundred possible scenarios?
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