In the calculation of beta, what formula is used combining covariance and variance of the market?

The calculation of beta, which measures the sensitivity of an asset's returns to the returns of the market, uses the relationship between the covariance of the asset's returns with the market returns and the variance of the market returns. The formula for beta is defined as the covariance of the asset's return with the market return divided by the variance of the market return.

In technical terms, this is expressed as:

βi = Cov(Ri, Rm) / Var(Rm)

Where:

• βi is the beta of the asset,
• Cov(Ri, Rm) is the covariance between the asset's returns (Ri) and the market's returns (Rm),
• Var(Rm) is the variance of the market returns.

This calculation allows investors to understand how much the asset's price is expected to move relative to a change in the overall market. A higher beta indicates greater volatility and, therefore, reflects higher systematic risk relative to the market.

Other options do not accurately represent the relationship needed to calculate beta; they incorporate incorrect mathematical operations or unrelated financial metrics, which would not yield the correct measure of systematic risk for an asset in relation to the market as a whole.