Question

​In a year where the stock market index (S&P 500) has a return of negative 10%,...

​In a year where the stock market index (S&P 500) has a return of negative 10%, a portfolio with which of the following betas would be the best investment decision?
a. 1.5
b. 2
c. 0.5
d. 1

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Answer #1

The beta of a stock measures the degree of correlation between that stock's returns and the broader market's return. In other words, a stock beta of y implies that for a unit % change in the broader market return, the stock's return would change by y %.

In this scenario, the market has a negative return of 10%, thereby implying that the stock with the lowest correlation to market return (lowest beta) should be the best investment decision. Hence, the correct option is (c) i.e the stock with beta of 0.5.

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