Which one of the following statements concerning beta is correct?
A) The beta assigned to the overall market is zero.
B) A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3.
C) A stock with a beta of 0.5 has 50 percent more risk than the overall market.
D) Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models.
E) The higher the beta, the higher the discount rate used for the dividend discount models.

Question

Quizplus · Accepted Answer

Beta is a measure of a stock's systematic risk, and it reflects the stock's sensitivity to market movements. The higher the beta, the higher the discount rate used for the dividend discount models. This is because a stock with a higher beta has more systematic risk and therefore requires a higher return to compensate for that risk. None of the other statements is correct.

Which One of the Following Statements Concerning Beta Is Correct