hi sir,
overall the lecture was wonderfull and clearly explained every thing but sir in example 7 how are we getting 2.1 times beta shouldn’t we rearrange the standard deviation formula of square root variance to get the the variance and then put it back in beta formula of Co variance/ variance?
Thanks

As I say in the next lecture, it is extremely unlikely that the current examiner would expect you to know the formula for the coefficient of correlation and therefore there is not really any need to worry about example 7.

However, the formula for the coefficient of correlation is that it is the covariance of the investment with the market divided by (SD investment x SD market).
So rearranging the equation gives covariance = coefficient of correlation multiplied by the two standard deviations.

Therefore beta = covariance / variance of mkt = coefficient of correlation x SD mkt x SD inv / variance mkt
If you divide top and bottom by the SD of the market, beta = coefficient of correlation x SD Inv / SD mkt.

However, again, I really would not worry about this for the current examiner.

Please post this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture about something different!

There are no lectures on mergers and acquisitions because they do not involve any technical work that is not already covered in other lectures – it is approach rather then learning new techniques.

So instead I am making recordings going through some past merger and acquisition questions. One has already been uploaded – question 1 from the December 2014 exam.

As I understood, in Example 7 we assume that there is no unsystematic risk so the total risk equals systematic risk (well-diversified portfolio). Why do we use correlation coefficient if the systematic risk is already given? Or maybe when we are given the correlation coefficient, which takes into account market imperfections, the assumption is not applicable and we adjust both the beta (12/4 * 0.7) and standard deviation (12 * 0.7) by the correlation coefficient, right?

I must admit though that i find it more interesting when the tutor takes you through the question answering, its as if you are in a visual class. Trully appreciated. keep up the good work.

mrs.azfar says

hi sir,

overall the lecture was wonderfull and clearly explained every thing but sir in example 7 how are we getting 2.1 times beta shouldn’t we rearrange the standard deviation formula of square root variance to get the the variance and then put it back in beta formula of Co variance/ variance?

Thanks

John Moffat says

As I say in the next lecture, it is extremely unlikely that the current examiner would expect you to know the formula for the coefficient of correlation and therefore there is not really any need to worry about example 7.

However, the formula for the coefficient of correlation is that it is the covariance of the investment with the market divided by (SD investment x SD market).

So rearranging the equation gives covariance = coefficient of correlation multiplied by the two standard deviations.

Therefore beta = covariance / variance of mkt = coefficient of correlation x SD mkt x SD inv / variance mkt

If you divide top and bottom by the SD of the market, beta = coefficient of correlation x SD Inv / SD mkt.

However, again, I really would not worry about this for the current examiner.

azizi says

wonderful work

John Moffat says

Thank you 🙂

Anjilee says

hi sir

i want to know there are no merger and acquistion lectures????

John Moffat says

Please post this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture about something different!

There are no lectures on mergers and acquisitions because they do not involve any technical work that is not already covered in other lectures – it is approach rather then learning new techniques.

So instead I am making recordings going through some past merger and acquisition questions. One has already been uploaded – question 1 from the December 2014 exam.

rchandar says

hi Sir,

where can I find the recording which you mentioned above relating to the December Q1?

Rgs

John Moffat says

Go to the main P4 page, and then click on the link “Updated. ACCA P4 Revision” (near the top of the page)

There are now 3 recent Question 1’s uploaded.

yenuar says

Hello John!

As I understood, in Example 7 we assume that there is no unsystematic risk so the total risk equals systematic risk (well-diversified portfolio). Why do we use correlation coefficient if the systematic risk is already given? Or maybe when we are given the correlation coefficient, which takes into account market imperfections, the assumption is not applicable and we adjust both the beta (12/4 * 0.7) and standard deviation (12 * 0.7) by the correlation coefficient, right?

John Moffat says

There is unsystematic risk in example 7 – the total risk is 12% but not all of this is systematic risk.

The coefficient of correlation = covariance of inv with mkt / (std devn (inv) x std devn mkt)

Beta = covariance of inv with mkt / (std devn mkt)^2

So…..beta = coeff of correlation x (std devn inv / std devn mkt)

(Std devn of inv in all the lines above is the total std devn of the investment – i.e. the measure of total risk in the investment)

The rest of the answer follows from there.

yenuar says

Thank you!

iddamalgoda says

Thank you

tinashe says

I must admit though that i find it more interesting when the tutor takes you through the question answering, its as if you are in a visual class. Trully appreciated. keep up the good work.

John Moffat says

Thank you 🙂

sabin says

plz do the solution of example 7

John Moffat says

You can find the solution to this (and to all the examples) at the end of the Course Notes.

slobodanm says

very good.

marcomota says

dont manage to watch the full video

it stops around minute 17

can u pls check?

thanks in advance

marco