Question

Which of the following stocks is likely to be the most sensitive to market fluctuations?

1. A stock with a high standard deviation
2. A stock with a high beta
3. A stock with a low correlation with the market
4. A stock with a low standard deviation
5. A stock with a low beta

Answer 1

Answer : A stock with a high beta

beta measures a stock’s volatility relative to the market as a whole, not for a single stock only. Beta is measure of the fund’s volatility relative to other funds in the market. That is, it measurers the market sensitivity. Low beta indicates low volatility and vice versa.

Standard deviation measures the risk of individual stocks that is a fund’s volatility. The volatility is measured by its standard deviation of returns over a short period of time. It indicates the tendency of the returns to rise or fall in a short span of time. A stock with high volatility will have a high standard deviation and vice versa.

Correlation measures how assets move in relation to each other. High correlation indicates high volatility of stocks with each other. It measures the tendency of two stocks to move in the same direction.