Which of the following statements is most correct?
A) Suppose the returns on two stocks are negatively correlated.One has a beta of 1.2 as determined in a regression analysis,while the other has a beta of −0.6.The returns on the stock with the negative beta will be negatively correlated with returns on most other stocks in the market.
B) Suppose you are managing a stock portfolio,and you have information which leads you to believe that the stock market is likely to be very strong in the immediate future,i.e. ,you are confident that the market is about to rise sharply.You should sell your high beta stocks and buy low beta stocks in order to take advantage of the expected market move.
C) In a recent issue,The Wall Street Journal ran a story on a company named Collections Inc. ,which is in the business of collecting past due accounts for other companies,i.e. ,it is a collection agency.According to the Journal,Collections's revenues,profits,and stock price tend to rise during recessions.This suggests that Collections Inc.'s beta should be quite high,say 2.0,because it does so much better than most other companies when the economy is weak.
D) Statements a and b are both true.
E) Statements a and c are both true.

Question

Quizplus · Accepted Answer

Statement A is correct because a stock with a negative beta moves in the opposite direction of the market, meaning if most stocks in the market are positively correlated with the market, a stock with a negative beta will indeed be negatively correlated with these stocks.

Which of the Following Statements Is Most Correct