Question

A stock's contribution to the market risk of a well-diversified portfolio is called 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. risk. According to Based on your understanding of the beta coefficient, indicate whether each statement in the following table is true or false: Statement True False Beta measures the volatility in stock movements relative to the market 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. 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 Market's standard deviation Correlation between Stocki and the market 42.00% 38.40% 0.78 Beta coefficient of Stock i

Answer 1

1: relevant

(This is the type of risk which is the contribution of stock to the market risk)

2: True

(Beta measures the degree of volatility of a security in comparison to the market as whole)

3: True

(Beta of 1 means that the stock moves in proportion with the market)

4: False

Stock more volatile with the market has a beta of more than 1.

5: 0.853125

Beta= correlation coefficient * SD of stock returns/ SD of market

= 0.78*0.42/0.384

=0.853125

6: 27% of the variance can be explained by market returns.

R-squared measures how closely each change in the price of an asset is correlated to a benchmark