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Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had...

Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had a 10% gain. Given this, it is most likely that the:

Multiple Choice

stock's beta has been calculated incorrectly.

S&P 500 cannot represent the overall market.

Incorrect firm released some negative information about itself.

the market index had an exceptionally good month.

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Answer #1

A stock with beta of 1.0 means that for every 1 unit change in the market index, there is 1 unit change in the stock price.

If S&P 500 represents the overall market and the stock's beta is calculated by regressing the stock returns against the S&P 500 returns, a beta of 1 indicates that for a 10% gain in the index, the stock must also gain by 10%. So , it is most likely that the stock's beta has been calculated incorrectly. S&P 500 is generally considered to be the best representation of market index.

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