Question

A stock has its past returns graphed against market returns. The line that has the best fit for the return data has the formula y = 0.335x + 0.501. What information can we derive from this?

		The beta of the stock is 0.501.
		The stock must have earned lower returns than the market during that period.
		The alpha of this stock is 0.335.
		The systematic risk of this stock is greater than that of the average stock.
		The beta of the stock is 0.335.

Answer 1

Correct answer: The beta of stock is 0.335

The plot of security return against market returns knows as security characteristic line(SCL) and Slope of SCL is Beta of security.

Equation for SCL given below:

where,

Y = Security excess return

X = Market excess return

= Beta of security

= Alpha

Thus, by referring above equation, we can say that in given equation beta of stock is 0.335