Question

6. The beta coefficient A stock's contribution to the market risk of a well-diversified portfolio is called risk. It can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market. Based on your understanding of the beta coefficient, indicate whether each statement in the following table is true or false: Statement True False Beta coefficients are generally calculated using historical data. Higher-beta stocks are expected to have higher required returns. Stock A's beta is 1.0; this means that the stock has a negative correlation with the market. OOO

Answer 1

1: systematic risk

This represents the risk inherent to the entire market. It is undiversifiable risk and is measured by beta.

2: Statement 1: True

Beta is measured based upon the historical returns of a particular stock and the volatility thereof.

Statement 2: true

Higher the beta, higher is the risk involved. Investors would need a higher required return to take on greater risk.

Statement 3: false

A beta of one implies that the stock has the same risk as market.