The volatility of a stock is often measured by its beta value. More information about beta values is provided below. The table below gives beta values for five stocks. Complete? (a) and? (b).
Company A B C D E
Beta 0.35 0.66 1.35 2.66 5.03
You can estimate the beta value of a stock by developing a simple linear regression? model, using the percentage weekly change in the stock as the dependent variable and the percentage weekly change in a market as the independent variable. The? S&P 500 Index is a common index to use. For? example, if you wanted to estimate the beta value for a? company, you could use the following? model, which is sometimes referred to as a market? model:
(% weekly change in company)=β0+β1(% weekly change in S&P 500 Index)+ε
The? least-squares regression estimate of the slope b1 is the estimate of the beta value for the company. A stock with a beta value of 1.0 tends to move the same as the overall market. A stock with a beta value of 1.5 tends to move? 50% more than the overall? market, and a stock with a beta value of 0.6 tends to move only? 60% as much as the overall market. Stocks with negative beta values tend to move in the opposite direction of the overall market.
1. For each of the five companies, interpret the beta value. (Choose the correct answer below)
A. The stocks of companies A and B move about 35% and 66% as much as the overall? market, respectively. The stocks of companies? C, D, and E move about 35%, 166%, and 403% more than the overall? market, respectively.
B. The stocks of companies A and B move about 65% and 34% as much as the overall? market, respectively. The stocks of companies? C, D, and E move about 135%, 266%, and 503% as much as the overall? market, respectivcely.
C. The stocks of companies A and B move about 35% and 66% less than the overall? market, respectively. The stocks of companies? C, D, and E move about 35%, 166%, and 403% more than the overall? market, respectively.
D. The stocks of companies A and B move about 35% and 66% more than the overall? market, respectively. The stocks of companies? C, D, and E move about 35%, 166%, and 403% more than the overall? market, respectively.
2. How can investors use the beta value as a guide for? investing? (Choose Below)
A. Investors can use the beta value to determine the minimum guaranteed return on a stock.
B. Investors can compare the beta values of several stocks to measure the risk involved in investing in the market during a particular week.
C. Investors can use the beta value as a measure of the volatility of a stock to assess its risk.
D. Investors can use the beta value of a? company's stock as a measure of the volatility of stocks of other companies in the same field.