Question

The beta of Southeast has been estimated to be 0.85. Which of the following statements about Southeast is FALSE? a. If the market rises by 1%, Southeast would be expected to rise by 1.85%. b. If the market falls by 1%, Southeast would be expected to fall by 0.85%. c. The covariance between Southeast and the market divided by the variance of the market is equal to 0.85. d. The sign of the covariance between Southeast and the market is greater than zero. e. Southeast is considered to be less risky compared to the market.

Answer 1

Beta of southeast = 0.85

It means that if market increases by 1%, stock of southeast will increase by 1% x 0.85 = 0.85%

So statement "a" is false and statement " b" is correct.

Now Formula of beta = covariance (southeast, market) / variance of market = 0.85

So statement is "c" is also correct.

As beta is positive, it implies that covariance also has to be positive because variance can never be negative.

So statement "d" is also correct.

And as beta is less than 1, it is less volatile that market. Market has beta of 1. So lower the volatility, lower the risk.

So last statement is also correct.

Answer : statement "a" is false.[ a. If the market rises by 1%, Southeast would be expected to rise by 1.85%]

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