Question

ONE WOULD EXPECT A STOCK WITH A BETA OF 1.25 TO INCREASE IN RETURNS: A) 25 PERCENT MORE THAN THE MARKET IN UP MARKETS b) 25 PERCENT MORE THAN THE MARKET IN DOWN MARKETS c)125 PERCENT MORE THAN THE MARKET IN UP MARKETS D)125 PERCENT MORE THAN THE MARKET IN DOWN MARKETS

Answer 1

25 PERCENT MORE THAN THE MARKET IN UP MARKETS. (which is Option A)

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Explanation:

A beta of 1.25 indicates that stock will provide a return of 25% more or less than the market. However, the return will move in the same direction as the market moves. Therefore, a stock with a beta of 1.25 will move upwards by 25% in up markets as market is assigned a beta of 1. Similarly, a stock having a beta of 1.25 will move downwards by 25% in a down market. Therefore, Option A is correct and remaining options are not correct.