If ABC Corporation common stock has a beta of 1.75, what can be inferred about its volatility relative to the market?

If ABC Corporation common stock has a beta of 1.75, what can be inferred about its volatility relative to the market?

• A. More volatile than the market.
• B. Less volatile than the market.
• C. Has the same volatility as the market.
• D. Has no volatility.

Answer: (A)

A beta of 1.75 indicates that ABC Corporation's common stock is more volatile than the overall market. Beta is a measure of a stock's sensitivity to market movements. A beta of 1 represents the market average, meaning the stock’s price moves in line with market movements. Conversely, a beta greater than 1 signifies that the stock tends to experience larger price swings in response to market changes. In this case, a beta of 1.75 suggests that ABC Corporation's stock will likely move 75% more than the market. For example, if the market increases by 10%, the stock is expected to rise approximately 17.5%. Similarly, if the market declines, the stock may fall more sharply compared to the overall market average. Thus, this higher beta reflects a greater level of risk associated with the stock, as its price can be considerably more volatile than that of the market as a whole.

A beta of 1.75 indicates that ABC Corporation's common stock is more volatile than the overall market. Beta is a measure of a stock's sensitivity to market movements. A beta of 1 represents the market average, meaning the stock’s price moves in line with market movements. Conversely, a beta greater than 1 signifies that the stock tends to experience larger price swings in response to market changes.

In this case, a beta of 1.75 suggests that ABC Corporation's stock will likely move 75% more than the market. For example, if the market increases by 10%, the stock is expected to rise approximately 17.5%. Similarly, if the market declines, the stock may fall more sharply compared to the overall market average. Thus, this higher beta reflects a greater level of risk associated with the stock, as its price can be considerably more volatile than that of the market as a whole.