Question

if the price of the stock rises and falls approximate 40% when the market rises and falls 20%, its beta is approximately...

1) 1.0

2) -2.0

3) 1.5

4) 2.0

5) 0.5

Answer 1

Answer is option 4) 2.0 ( 2*20% = 40% see below note)

Beta Coefficient measures the volatility of a security's return relative to the market. The larger the beta, the more volatility the security.A Beta of 1.0 indicates a security of average risk A sock with beta greater than 1.0 has above average risk, ie; its returm would be more volatile than the market return. For example market return move up by 5%a stock with a beta of 2 would find its returns moving up by 10% ( 2*5%). Similarly declaining market return by 5% would produce a decline of 10% in the return of that security.Therefore a stock with beta less than 1.0 woud have below average risk.