Question

If a stock's Beta is negative, that suggests that... (choose the single best response)

Group of answer choices:

Its returns are negatively correlated with the market.

The stock's CAPM expected return is negative.

No investors would want to buy the stock.

The stock's returns have been consistently negative recently.

None of these is true.

Answer 1

Solution.>

The correct answer is (A).

If Beta is negative, that means stock's returns are negatively correlated with the market. For eg. if the market goes up, the stock will go down and if the market goes down, the stock value will go up.

Option B is not correct because, according to CAPM, Expected Returns = Risk-Free rate + Beta * Market Risk Premium, if the risk-Free rate is greater than the multiplication of Beta and Market Risk Premium, the expected return will be positive.

Option C is not correct because investors will buy this stock if they expect the market to go down.

Option D is not correct because if the market is down consistently, the stock price would have been positive recently.

Option E s not correct because Option A is true.

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