Which of the following is a characteristic of beta? Multiple Choice Beta measures only the volatility of returns on an individual bond relative to a bond market index. A beta of less than 1.0 has less risk than the market. A beta is always equal to 1.0. A beta of 1.0 has zero risk.
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Beta measures the volatility of an asset or portfolio in relation to the market as a whole. A beta of less than 1.0 indicates that the asset is less volatile than the market. Show more…
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Multiple Regression. Beta is a common measure of stock-market risk or volatility. It is typically estimated as the slope coefficient for a simple regression model in which stock returns over time are the dependent Y variable, and market index returns over time are the independent X variable. A beta of 1 indicates that a given stock's price moves exactly in step with the overall market. For example, if the market went up 20 percent, the stock price would be expected to rise 20 percent. If the overall market fell 10 percent, the stock price would also be expected to fall 10 percent. If beta is less than 1, stock price volatility is expected to be less than the overall market; if beta is more than 1, stock price volatility is expected to be more than the overall market. In some instances, negative beta stocks are observed. This means that stock prices for such firms move in an opposite direction to the overall market. All such relationships are often measured using monthly data for extended periods of time, sometimes as long as 5 years, and seldom hold true on a daily or weekly basis. Savvy investors need to be aware of stock-price volatility. Long-term investors often seek out high-beta stocks to gain added benefit from the long-term upward drift in stock prices that stems from economic growth. When a short-term dip in stock prices (bear market) is expected, investors may wish to avoid high-beta stocks to protect themselves from a market downturn. The table below shows estimation results for a multiple regression model that relates beta to seven fundamental determinants of stock-price volatility. Market capitalization reflects the market value of the firm's common stock, and is a measure of firm size. The P/E ratio is the firm's stock price divided by earnings per share for the current 12-month period. It shows how much current investors are willing to pay for each dollar of earnings. The current ratio is the sum of current assets divided by the sum of current liabilities, and is a traditional indicator of financial soundness. Dividend yield is common dividends declared per share expressed as a percentage of the average annual price of the stock. Projected sales growth is the projected gain in company revenues over the next 3-5 years. Finally, institutional holdings are the percentage of a company's stock that is owned by institutions, such as mutual funds, investment companies, and pension funds. How would you interpret the finding for each individual coefficient estimate? How would you interpret findings for the overall regression model?
Ameer S.
2) The "beta coefficient" is a measure of the riskiness of a stock. It is the slope of the regression line between the stock's return (i.e., percentage gain or loss) as the "Y" variable, and the overall market return, the "X" variable. For Sirius Cybernetics Corporation relevant data for four time periods (usually, months) are as follows: Return on Sirius Cybernetics -5% 4.2% 11.4% 16.6% Return on overall market -5% +1% +7% +13% a) What is the "beta coefficient" for Sirius Cybernetics? Give a 95% confidence interval for this quantity. b) Stocks with beta coefficients of 1 have just as much risk as the overall stock market. Perform an appropriate hypothesis test of H0: ̒1 = 1 vs. HA: ̒1 ≠1.
Madhur L.
The beta of a firm's stock indicates the degree to which changes in stock price track changes in the stock market as a whole and is interpreted as the market risk of the portfolio. A beta of 1.0 indicates that, on average, the stock rises (or falls) the same percentage as does the market. A beta of 2.0 indicates a stock that rises or falls at twice the percentage of the market. The beta of a stock portiolio is the weighted average of the betas of the individual stock securities, weighted by the current market values (market value is share price times number of shares). Consider the following portfolio: 100 shares Speculative Computer at $$\$ 35$$ per share, beta $=2.4$ 200 shares Conservative Industries at $$\$ 88$$ per share, beta $=0.6$ 150 shares Dependable Conglomerate at $$\$ 53$$ per share, beta $=1.2$ a. Find the beta of this portfolio. b. To decrease the risk of the portfolio, you have decided to sell all shares of Speculative Computer and use the money to buy as many shares of Dependable Conglomerate as you can. ${ }^{16}$ Describe the new portfolio, find its beta, and verify that the market risk has indeed decreased.
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