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:

a.Stock A's beta is 1.0; this means that the stock moves in the same direction and magnitude as the market.

b.Higher-beta stocks are expected to have lower required returns.

c.A stock that is more volatile than the market will have a beta of more than 1.0.

Question

madash4504 madash4504

11-03-2020
Business

contestada

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:

a.Stock A's beta is 1.0; this means that the stock moves in the same direction and magnitude as the market.

b.Higher-beta stocks are expected to have lower required returns.

c.A stock that is more volatile than the market will have a beta of more than 1.0.

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anthonynguyen3006 anthonynguyen3006 · Answer 1 · 2020-03-13T07:35:13+01:00

Answer:

a) TRUE

b) FALSE

c) TRUE

Explanation:

A stock's contribution to the market risk of a well-diversified portfolio is called SYSTEMATIC risk.

a) TRUE. If beta of stock A = 1, stock A will move in the same direction as the market, by about the same amount.

b) FALSE. Higher beta stocks are expected to have higher required returns, as investors expect to receive higher compensation due to higher risk level of high beta stocks

c) TRUE. Market portfolio has beta = 1. Any stocks that have beta > 1 will be more volatile than the market.