COLLAPSE If a company stock is highly correlated with the market return will its
ID: 2659075 • Letter: C
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COLLAPSE If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why? COLLAPSE COLLAPSE If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why? If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why? If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why? If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why? If a company stock is highly correlated with the market return will its beta be high or low? Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why?Explanation / Answer
Q1: If a company stock is highly correlated with the market return will its beta be high or low?
Ans: Its Beta***, i.e., volatility, will be closer to the market as a whole.
Q2. Would an investor pay more for a high beta stock or low beta stock if everything else is constant? Why?
Ans: An investor will pay less for a high beta stock since it carries more risk because of higher volatility, and vice versa.
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***Beta:
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.
Also known as "beta coefficient."
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