Stock A has a beta of 1.5
Stock B has a beta of - 0.6
which stock has the highest risk acoording to their beta, A or B.
Why?
2007-11-14 12:56:54 · 4 answers · asked by Anonymous in Business & Finance ➔ Investing
Beta is a number that compares the volitility of a stock to that of an index, normally the S&P 500. A beta greater than 1.0 indicates that the stock tends to fluctuate in price more than the index. A beta less than 1.0 indicates that it tends to fluctuate less than the index. A negative beta indicate that the stock tends to have a negative corrolation to the index. In other words it goes down when the index goes up and goes up when the index goes down. Since the overall trend of the index is up, a stock with a negative beta I would have to say has an overall tendency to go down in price. So in that respect B is certainly more risky than A, since it will tend to increase in value faster than the index which itself has an upward bias of about 10% annually.
That however is not the answer you are looking for. The generally accepted answer is that stock A has more risk than stock B because it will fluctuate more in price than the index. The concept of risk is where there needs to be an understanding of what the term actually means. There is risk that a stock will not perform--a stock with a negative beta.
2007-11-14 13:27:30 · answer #1 · answered by Anonymous · 2⤊ 1⤋
it would depend on the current state of the economy. Having a negative beta in a bull market would mean that on average the stock would move in the opposite direction of the market; however, in a bear market, the negative beta would be preferable. Beta simply measures the amount of risk in relation to the market's risk. Both could be considered risky compared to the market.
2007-11-14 18:07:27 · answer #2 · answered by Anonymous · 1⤊ 0⤋
A, The beta with the greater absolute value. the returns are going to fluctuate more than the returns of the market, If the betas were 1.5 and -1.5 the risk would be the same.
2007-11-14 13:08:14 · answer #3 · answered by jeff410 7 · 1⤊ 1⤋
It is not possible to tell from beta which stock has more risk. According to the Capital Asset Pricing Model (CAPM), there are two types of risk -- market risk and risk that is not related to the market. Beta measures market risk. The other risk is diversifiable -- so we are not rewarded for it.
The one with the higher beta has more market risk. It is not possible to tell which has more risk not related to the market.
2007-11-14 14:19:38 · answer #4 · answered by Ranto 7 · 0⤊ 2⤋