Which of the following statements is (are)necessarily true?
A)If a stock's returns are negatively correlated with the returns of the general market, it will have a market-beta equal to -1.0.
B)If a stock's returns are negatively correlated with the returns of the general market, it will have a negative market-beta.
C)If a stock's returns are positively correlated with the returns of the general market, it will have a market-beta equal to +1.0.
D)Both A and B are true.

Question

Quizplus · Accepted Answer

A stock's market-beta is a measure of its systematic risk, which is the risk that cannot be eliminated through diversification. Beta is calculated as the ratio of the stock's covariance with the market returns to the variance of the market returns. A negative covariance indicates that the stock's returns move in the opposite direction of the market returns, which means the stock will have a negative beta. However, the magnitude of the beta will not necessarily be -1.0, as it depends on the strength of the correlation between the stock's returns and the market returns. Therefore, statement A is false. Statement B is true, as explained above. Statement C is false, as a positive correlation indicates that the stock moves in the same direction as the market, but the magnitude of the beta may not be exactly +1.0. Statement D is false, as statement A is false. The statement that if a stock's returns are negatively correlated with the returns of the general market, it will have a negative market-beta is true. However, statement A is not necessarily true since the stock's beta value will depend on the magnitude of the correlation with the market returns, not just the direction.

Which of the Following Statements Is (Are)necessarily True