I have been given the expected returns and standard deviations of 2 stocks A and B, as well as the standard deviation of the market portfolio and correlation between security A and the market portfolio. I am asked to determine the idiosyncratic risks of both A & B as well as the value of Beta for B given it is positive.

I am finding it difficult to calculate the idiosyncratic risk of B without its covariance, correlation, or the risk-free rate or expected return of the market.


1 Answer 1


Check out page 24 of Active Portfolio Management (mine is Second Edition) if you can get your hands on it. Problem 3 is effectively this exact problem. Or see here:

Calculating the correlation of stock A with stock B

This should be all the tools you need to solve it!


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.