Question

Determine the beta for Stock A based on the following set of returns. Of course, the reliability of a beta calculated with only four data points may be low. Interpret the beta that you have calculated.   

Stock A Returns	Market Returns
6.0%	5.0%
15.0%	12.5%
-4.2%	-3.5%
9.0%	7.5%

Answer 1

Beta is computed as follows.

(a)	(b)	(c)
Stock A Returns	Market Returns	(a) / (b)
6.00%	5.00%	120.0%
15.00%	12.50%	120.0%
-4.20%	-3.50%	120.0%
9.00%	7.50%	120.0%

As the ? is 120% or 1.2 for all four data points, the varatge is also 120% only.

Interpretation:

? < 1 the stock is less volatile than the market as a whole

? > 1 the stock is more volatile than the market as a whole

? < 0 the stock is loosing money while the market as a whole is gaining

Therefore, in the present question, ? is more than 1 and the stock is more volatile than the market as a whole.