IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?
A)The market risk premium for Apple must be larger than the market risk premium of IBM.
B)If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM.
C)Apple's expected rate of return must be three times as large as IBM's.
D)none of these choices are complete.

Question

Quizplus · Accepted Answer

Beta measures the sensitivity of a stock's return to the overall market return. A beta of 1.0 implies that the stock's return is expected to move in line with the market return. A beta of 3.0 implies that the stock's return is expected to be three times as volatile as the market return. Option A is not necessarily true as the size of the market risk premium is independent of beta. Option C is not necessarily true as beta does not determine the expected rate of return. Option B is correct as the expected return of a more volatile stock like Apple will increase more than a less volatile stock like IBM in a more risk-averse market.

IBM Has a Beta of 1