Question

6. The CAPM model introduces the concept of Beta as a measure of riskiness. If the Beta for a firm 1.3, what does that tell us about the stock of that firm? 7. Some stock analysts and stock market analysts say that optimism is one of the most important factors for individual corporate stocks and for the stock market as a whole. What does this mean? Explain why you agree or disagree. 8. Explain briefly why volatility is considered a risk in the stock market. 9. Explain what "efficient" means with regard to the stock market. Is the stock market of the U.S. efficient in pricing stock? 10. The stock markets in the U.S. are more efficient than in many other countries. Does that mean that all information is available to all investors? 11. List the factors that make emerging market investments more risky for Americans.

Answer 1

6]

Beta measures the systematic risk of the stock, i.e. the risk inherent in the market which cannot be diversified away.  The beta of the overall market is always equal to 1.

Beta of a stock is a measure of the sensitivity of the stock to the returns of the overall market.

If beta is 1.3, it means that for every 1% change in the market return, the return of the stock changes by 1.3%.