To determine the stock's covariance with the market portfolio, we can use the relationship between beta ($\beta$), the covariance ($\text{Cov}(S,M)$) between the stock and the market, and the variance of the market ($\text{Var}(M)$):

$\beta = \frac{\text{Cov}(S,M)}{\text{Var}(M)}$

Rearranging the formula to solve for $\text{Cov}(S,M)$:

$\text{Cov}(S,M) = \beta \times \text{Var}(M)$

Given:

• $\beta = 1.9$
• $\text{Var}(M) = 0.85$

Now, substituting the values:

$\text{Cov}(S,M) = 1.9 \times 0.85 = 1.615$

Thus, the covariance between the stock and the market portfolio is 1.615.

Correct answer: 1.615

Would you like any further details on this, or do you have any other questions?

Here are 5 additional questions that expand on this topic:

1. How does a beta value greater than 1 affect a stock's risk in relation to the market?
2. What is the significance of a stock's variance, and how does it differ from covariance?
3. How would the stock's covariance change if the market variance increased?
4. How would you interpret a stock with a beta of less than 1?
5. Can a stock's beta change over time, and if so, why?

Tip: Beta measures a stock's sensitivity to market movements. A higher beta indicates more volatility compared to the market.