Question 1
a.Define the term beta
b. Is a high dividend yield better than a low yield?
Question 1
a. Beta measures the volatility of a stock in relation to the market. A beta of 1 indicates, that the stock swings with the market. A beta of 1 indicates that the stock swings more than the market and a beta of less than 1 indicates that the stock swings less than the market.Beta is the systematic risk of a stock. The higher the beta, the higher will be the expected return of the investors.
Beta can be calculated as = Correlation of the stock with the market * standard deviation of stock/ standard deviation of market
b. High dividend yield stocks ( means the dividend paid by the companies is high) provide a higher income but it carries more risk as well. Low dividend yield provides a low income but the companies having a low dividend yield stocks are more mature and have steady income and growth. If the investor prefers current income in the form of dividend income for them a high dividend yield stock is better than a low yield. The people in the high tax bracket prefer a low dividend yield stock and people who prefer higher current income and are in the low tax bracket prefer high dividend yield stocks.
Question 1 a.Define the term beta b. Is a high dividend yield better than a low yield?
a) “The reason that a high beta stock has a greater expected return than a low beta stock is because the high beta stock must have more volatile returns than the low beta stock." Using the CAPM, critically evaluate this statement and demonstrate the links between betas and stock return variability, using equations and examples where necessary.
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