Question

Estimate a stock's beta based on the following information: Month 1 = Stock + 0.5%, Market + 1.1%; Month 2 = Stock + 1.0%, Market + 1.4%; Month 3 = Stock − 1.5%, Market − 2.0%.

		Equal to 1.0
		Less than 1.0
		Greater than 1.0
		Indeterminate

Answer 1

Beta is a relationship between the percentage change in stock return when market return changes.

Month 1 = Stock moves by 0.5% and market moves by 1.1% , thus stock moves by a smaller percentage. Thus, Beta is less that 1.

Month 2 = Stock moves by 1% and market moves by 1.4% , thus stock moves by a smaller percentage. Thus, Beta is less that 1.

Month 3 = Stock moves by -1.5% and market moves by 2% , thus stock moves by a smaller percentage. Thus, Beta is less that 1.

Thus the overall Beta is less than 1.