Question

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

Answer 1

Answer:

Statement 1 : True

Statement 2 : True

Statement 3: False

Explanation:

Beta of a stock represents a coefficient that depicts degree of responsiveness of stock returns with respect to the market return.

Beta is always calculated with respect to the market and is a measure of systematic risk.

A stock with beta 1 denotes, that sensitivity or volatility in the movement of stock prices are exactly equal to the movement of market prices. So if the market falls, the stock's price will fall by an equal magnitude.

A stock whose sensitivity or volatility is more i.e more fluctuation in expected returns w.r.t that of the market, will have a beta higher than 1. This means if market rises, it will cause a greater rise in the stock price and vice versa.

Higher beta stocks convey higher degree of risk owing to higher sensitivity and fluctuations. Thus those stock are expected to have higher required returns to commensurate for extra risk.