Question

2. Which of the following statements concerning beta is correct?

a. A stock with a beta of 0 is expected to provide a rate of return equal to the market portfolio

b. A stock with a beta equal to 1 has no risk

c. Stocks with negative betas have the least amount of risk FALSE

d. A stock with a beta greater than 1 is expected to be more volatile than the market portfolio

Answer 1

According to CAPM,

market portfolio has beta = 1

Now if any stock has beta = 1, it indicates that if market rises/falls by 1%, stock will also rises/falls by 1%

If beta is greater than 1, the rise/fall in stock will be higher than market

If beta = 0, no market risk, it will provide rate of return equal to risk free asset

If beta is negative, it will follow opposite relation with market. if market rises, stock falls and vice versa

correct statement : d. A stock with a beta greater than 1 is expected to be more volatile than the market portfolio

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