Question

5. Stock A has beta of 0.59, stock B has beta of -1.39. When the market goes up, what happens to returns of Stock A and what happens to Stock B? Why? (5 points)

Answer 1

Beta is measure of sensitivity of stock with change in market index.

If coefficient of Beta of Stock is 1, one unit change in market index cause one unit change in stock in same direction.

If coefficient of Beta of Stock is more than 1, one unit change in market index cause more than one unit change in stock in same direction.

If coefficient of Beta of Stock is less than 1 but greater than zero, one unit change in market index cause less than one unit change in stock in same direction.

If coefficient of Beta of Stock is less than  zero(negative), change in market index cause change in stock in opposite direction.

In above case. Stock A has beta of 0.59, which means if market goes up then Stock A also goes up but less than market.

Stock B has beta of -1.39, which means if market goes up then Stock B goes down.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.