Question

You have the following data on (1) the average annual returns of the S&P 500 for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? $&P 500 Stock A StockB Years 0.03 0.16 0.05 2 -0.05 -0.20 0.05 0.05 3 0.01 0.18 -0.10 -0.25 0.05 0.14 0.05 0.06 ObA 0; bg+1.0 ObA 0: bp 0.0. O bA 0; bg-1.0 bA 0: be 0.0.

Answer 1

Beta measures the sensitivity of the stock's return to the market return.

It can be seen from the data that in every year, the return of stock is positive when the S&P 500 return is positive, and negative when the S&P 500 return is negative. It can also be seen that in the positive years, the return of Stock A is higher than the S&P500 return, and in negative years, the return of Stock A is lower than the S&P 500 return.

Therefore, we can conclude that the beta of Stock A is more than 0.

The return of Stock B is constant every year. Therefore its beta is 0.

The second answer is correct.