Question

Consider a stock with a beta of 0.5. Which of the following statement is true? (All else equal…)

	If the market goes up by 1%, then the expected return of the stock goes down by 0.5%.
	If the market goes up by 1%, then the expected return of the stock goes up by 2%.
	If the market goes up by 2%, then the expected return of the stock goes up by 1%.
	If the risk-free rate goes down by 1%, then the expected return of the stock goes down by 1%.

Answer 1

Option (c) is correct

A beta of less than 1 means that the stock is less volatile than the market. Here, given beta of 0.5 means that if the market goes up by 2%, then the expected return of the stock goes up by 1%.