Question

Which of the following statements about Beta is true?

1. Betas are about equally likely to be positive or negative

2. The average beta is about 1

3. The better diversified a portfolio is, the closer its beta is to 0

4. The expected return on a stock with a beta of 2.0 should be twice the expected return of a stock with a beta of 1.0.

a. 4 only

b. 3 and 4

c. 2 and 4

d. 2 only

e. 1 and 3

f. 1 and 4

Answer 1

Beta

It is a tool or a standard to measure the systematic risk or volatility for portfolio or security.

Each of the above statements is explained as follows:

1. The beta of a stock is more likely to positive than negative. A negative beta is a highly unlikely situation. Therefore, this statement is False.

2. The market beta of a stock or security is around 1. This means the price of security tends to move with the market. Therefore the above statement is True.

3. It is not necessary that the better-diversified portfolio will have a beta tending towards zero. The above statement is False.

4. The returns of the stock are not affected with the change in beta since beta only measures the risk of a security or a portfolio. The above statement is False.

Option d) 2 only is the correct answer for the question asked above.

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