The average of the beta values for all individual stocks is:
A) greater than 1.0; most stocks are aggressive.
B) less than 1.0; most stocks are defensive.
C) unknown; betas are continually changing.
D)exactly 1.0; these stocks represent the market.

Question

Quizplus · Accepted Answer

The correct answer is D because by definition, the beta of the overall market is 1.0. As such, the average for all individual stocks must also be exactly 1.0 if they are representative of the market. Choice A implies that most stocks are more aggressive than the market, which cannot be true as a whole. Choice B implies that most stocks are less aggressive than the market, which also cannot be true as a whole. Choice C is incorrect because while it is true that betas are continually changing, the average at any given time should still be 1.0 if the stocks are representative of the market.

The Average of the Beta Values for All Individual Stocks