If a stock's returns are positively correlated with the returns on the general stock market, then
A)its market-beta must be exactly equal to 1.0.
B)its returns will increase or decrease by the same percentage as the percentage increase or decrease in the general stock market.
C)its market-beta must be greater than 1.0.
D)None of the above is a true statement.

Question

Quizplus · Accepted Answer

A positive correlation with the market does not specify the degree of that correlation. A beta of 1.0 indicates a perfect positive correlation where the stock moves exactly with the market. A beta greater than 1.0 indicates a stock is more volatile than the market, but a positive correlation can exist with betas both less than and greater than 1.0, not necessarily exactly 1.0 or always greater than 1.0.

If a Stock's Returns Are Positively Correlated with the Returns