Series 7 Exam Question 233: Answer and Explanation

Question: 233

One of your clients is interested in purchasing a stock with a beta of 1.6. You can tell them that

• A. the stock is equally as volatile as the market
• B. the stock is less volatile than the market
• C. the stock is more volatile than the market
• D. cannot be determined

Correct Answer: C

Explanation:

C. Beta is a measure of how volatile a stock is as compared to the market. A stock with a beta of 1 would be equally volatile as the market, meaning that if the market increased 5 percent over a given period of time, you would expect the price of your stock to increase 5 percent. If the market declines by 5 percent, you would expect the price of your stock to decline by 5 percent. If you are purchasing a stock with a beta greater than 1, it is more volatile than the market. In this case, you are dealing with a stock with a beta of 1.6, meaning that if the market increased or decreased by 10 percent over a given period of time, you would expect the price of your stock to increase 16 percent or decrease 16 percent. A stock with a beta less than 1 would be less volatile than the market.