Management Notes

Reference Notes for Management

An “aggressive” common stock would have a “beta”

An “aggressive” common stock would have a “beta”

A. equal to zero.
B. greater than one.
C. equal to one.
D. less than one.

The Correct Answer for the given question is option B. greater than one.


Answer Explanation for Question: An “aggressive” common stock would have a “beta”

Beta is a measure of systemic risk or volatility of a security or portfolio relative to the market as a whole. The capital asset pricing model (CAPM) describes the relationship between systematic risk and expected return on assets (usually stocks) using beta.

The beta of the company stock tends to be similar to the market return if the beta is close to one. The returns on the stock of the company are more volatile than the market return if beta is greater than one. The stock is classified as aggressive if its beta is greater than 1. Beta less than one means the company stock returns are less volatile than the market returns. Defensive stocks are those with betas less than one.

Beta can be estimated using a variety of methods. The return of the company stock, and the return of the market, can be collected, and the relationship between them can be estimated using statistical methods. As an alternative, we could analyze the company in more detail, and compare its operating and financial performance with that of other companies in the sector in which it operates, and with that of other sectors and the economy at large. Beta values are published by a variety of sources. Beta values should be used to inform risk management strategies, but it is important to understand how the estimates were obtained.

A line that describes the relationship between an individual security’s returns and returns on the market portfolio.

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