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 .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 used as a measure of systematic risk in determining the appropriate discount rate for the dividend discount models. A higher beta means that the stock is more volatile and has higher systematic risk, so the discount rate used in the dividend discount model will also be higher. Option A is incorrect because the beta assigned to the overall market is always 1. Option B is incorrect because a stock with a higher beta earns a higher risk premium. Option C is incorrect because a beta of 0.5 means that the stock has half the risk of the overall market. Option D is incorrect because T-bills are usually used as the risk-free rate in the dividend discount models, but beta is not applied to it.

Which One of the Following Statements Concerning Beta Is Correct