9. The beta coefficient
A stock’s contribution to the market risk of a well-diversified portfolio is called ________ risk. According to the Capital Asset Pricing Model (CAPM), this risk can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market.
Based on your understanding of the beta coefficient, indicate whether each statement in the following table is true or false:
|
Statement |
True |
False |
|
|---|---|---|---|
| Over time, a stock with a beta of 1.0 produces a return that goes up and down with a 1:1 relationship with the return on the market. | |||
| A stock that is more volatile than the market will have a beta of less than 1.0. | |||
| Beta measures the volatility in stock movements relative to the market. |
There are different ways of calculating the beta coefficient for a stock. Using the information given in the following table, calculate the beta coefficient of Stock i:
|
Data |
|
|---|---|
| Stock i’s standard deviation | 35.00% |
| Market’s standard deviation | 32.00% |
| Correlation between Stock i and the market | 0.65 |
| Beta coefficient of Stock i: | ??? |
To calculate the beta of another company, using regression analysis, you get the value of R² as 0.43. Based on your calculation, which of the following interpretations is true?
A. 43% of the variance in the company’s returns can be explained by the market returns.
B. 57% of the variance in the company’s returns can be explained by the market returns.
