Question

Based on the following information, make an estimate of the stock's beta: Month 1 = Stock +1.1%, Market +1.5%; Month 2 = Stock +1.4%, Market +2.4%; Month 3 = Stock -2.1%, Market -2.9%. A. Beta is greater than 1.0. B. Beta is less than 1.0. C. Beta equals 1.0. D. There is no consistent pattern of returns.

Answer 1

Beta is the measure of volatility of returns of a stock in relation to the market. A beta of 1 denotes that stock return is equal to the market return. In month 1, the stock return increases by 1.1% which is less than the increase in market return of 1.4%. Same is the case for month 2. For month 3, the stock decreases by -2.1% which is less than the decrease in market return of -2.9%. From these returns, we can observe that, Beta is less than 1 (or less than market return). (Option B)