Conceptual Overview: Explore how stock volatility relates to the beta coefficient b risk measure. The tendency of a stock to move with the market is measured by its beta coefficient, b When first loaded, the graph shows the line for an average stock, which necessarily matches the market return. In a year when the market returns 10%, the average stock returns 10%. And in a year when the market goes down-10%, the average stock goes down -10% also. The slope of the line for the average stock is b= 10 A more volatile stock would change more extremely. Drag the line vertically so that it has a slope of 2.0. For this mnore volatile stock, in a year when the market returned 20 %, the volatile stock did better with a 30% return, and when the market lost - 10%, the volatile stock lost big with a-30%% change. Now drag the line so that it has a slope ofb=05 This stom less volatile than the average stock and reacts less extremely than the market, In a year the market returned 20%, the less volatile stock returned slightly less at about 15% And in a year when the market lost-10%, the less volatile stockk did a letter better wth 0% "return." There are two sirmple principles: 1. The larger the beta coefficient b (le., the steeper the slope), the more volatile the returns from the stock. 2. Beta coefficients b greater than 1.0 indicate the stock is nore volatile than average and slopes less than 1.0 indicate the stock is less volatile than average
Conceptual Overview: Explore how stock volatility relates to the beta coefficient b risk measure. The tendency of a stock to move with the market is measured by its beta coefficient, b When first loaded, the graph shows the line for an average stock, which necessarily matches the market return. In a year when the market returns 10%, the average stock returns 10%. And in a year when the market goes down-10%, the average stock goes down -10% also. The slope of the line for the average stock is b= 10 A more volatile stock would change more extremely. Drag the line vertically so that it has a slope of 2.0. For this mnore volatile stock, in a year when the market returned 20 %, the volatile stock did better with a 30% return, and when the market lost - 10%, the volatile stock lost big with a-30%% change. Now drag the line so that it has a slope ofb=05 This stom less volatile than the average stock and reacts less extremely than the market, In a year the market returned 20%, the less volatile stock returned slightly less at about 15% And in a year when the market lost-10%, the less volatile stockk did a letter better wth 0% "return." There are two sirmple principles: 1. The larger the beta coefficient b (le., the steeper the slope), the more volatile the returns from the stock. 2. Beta coefficients b greater than 1.0 indicate the stock is nore volatile than average and slopes less than 1.0 indicate the stock is less volatile than average
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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Transcribed Image Text:Conceptual Overview: Explore how stock volatility relates to the beta coefficient b risk measure.
The tendency of a stock to move with the market is measured by its beta coefficient.
returns 10%. And in a year when the market goes down -10%, the average stock goes down - 10% also. The slope of the line for the average stock is b = 1.0. A more volatile stock would change more extremely. Drag the line vertically so that it has a slope of b
2.0. For this more volatile stock, in a year when the market returned 20%, the volatile stock did better with a 30% return, and when the market lost -10%, the volatile stock lost big with a -30 % change. Now drag the line so that it has a slope ofb = 05. This stop
less volatile than the average stock and reacts less extremely than the market, In a year the market returned 20%, the less volatile stock returned slightly less at about 15%. And in a year when the market lost-10%, the less volatile stock did a letter better with
When first loaded, the graph shows the line for an average stock, which necessarily matches the market return. In a year when the market returns 10%, the average stock
0% "return.
There are two sirmple principles:
1. The larger the beta coefficient b (i.e., the steeper the slope), the more volatile the returns from the stock
2. Beta coefficients b greater than 1.0 indicate the stock is nore volatile than average and slopes less than 1.0 indicate the stock is less volatile than average
Return on Stocks
30% -
20%
b= 1 00
10%
-10%
10%
20%
Return on Market
-20%
30%
-10%-
-20%
-30%
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Transcribed Image Text:1. For a stock with a beta coefficient of b 1.50, it is:
a. more volatile than the average stock.
b. about the same volatility of an average stock.
c. less volatile than the average stock.
d. Cannot determine.
-Select-
2. For a stock with a beta coefficient of b = 1.50, in a year when the market return is 20%, we expect, in this particular example, the stock's return to be:
a. about 20%.
b. about 25%.
C. about 30%.
d. not enough information to determine.
Select- v
3. For a stock with a beta coefficient of b = 1.50, in a year when the market return is -10%, we expect, in this particular example, the stock's return to be:
a. about 0%.
b. about -10%.
C. about -20%.
d. about -30%.
-Select- v
4. For a stock with a beta coefficient of b = 0, which of these statements is true in this particular example?
a. The line in the graph is flat
b. It is like a riskless asset with a guaranteed return of 10% no matter what the market does
c. There is no chance of lower performance than the market but also no chance of better performance.
d. All of the above.
Selec-
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