Question

Conceptual questions on beta

A stock’s contribution to the market risk of a well-diversified portfolio is called   risk. According to the Capital Asset Pricing Model (CAPM), this risk can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market.

Based on your understanding of the beta coefficient, indicate whether each statement in the following table is true or false:

Statement	True	False
A stock that is more volatile than the market will have a beta of more than 1.0.
Stock A’s beta is 1.0; this means that the stock moves in the same direction and magnitude as the market.
Higher-beta stocks are expected to have lower required returns.

Answer 1

As per CAPM, required return on a stock = risk free rate + beta*market risk premium

Beta is a measure of risk and market beta is 1. Higher the beta, higher the risk, higher will be the required/expected return

A stock which is more volatile than the market will have a beta of more than 1 = True

Stock A's beta is 1. It means that stock moves in the same direction and magnitude as market = True

Higher beta stocks are expected to have lower required returns = False