The beta of ABC Co.stock is the slope of:
A)the security market line.
B)the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C)the arbitrage pricing line.
D)the characteristic line for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Question

Quizplus · Accepted Answer

The beta of a stock is calculated by regressing its returns against the returns of a market portfolio for the same period. The characteristic line for this plot gives the beta of the stock. Option A is incorrect because the slope of the security market line represents the expected return of the market for a given level of risk. Option B is incorrect because the slope of the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills gives the market risk premium. Option C is incorrect because the slope of the arbitrage pricing line represents the risk premium for a given factor.

The Beta of ABC Co