Question

Question 1

a.Define the term beta

b. Is a high dividend yield better than a low yield?

Answer 1

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.