Question

Suppose AMD has a beta of 2.37 and Target has a beta of .54

Which of the following is true?

	A.	If the market drops, it is likely that AMD 's price will drop more than Target's price
	B.	AMD is considered a riskier stock than Target
	C.	If the market increases it is likely that AMD's price will see a greater increase than Target's price.
	D.	All oft he above are true

Answer 1

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The answer is D. ALL OF THE ABOVE ARE TRUE.

Explaination:

Beta represents => Systematic Risk/Non-diversifiable risk/Market risk:

1. Risk related to the economy.
2. Cannot be killed by diversification.

For Example:
1. Suppose a war is declared between two countries.
2. Government decisions / New political party coming into power.
3. The risk due to the cyclic nature of Industry.
4. Interest rate, Inflation fluctuation risk.

HIGER THE BETA, HIGHER THE RISK.
BECAUSE AMB HAS MORE BETA IT IS RISKER.

Beta that is systematic risk is determined by: Rate of change of stock return to the rate of change of market return. It is the sensitivity of stock return to Market return.

Return of stock at the end of year = 15%
Return of stock at the start of year =10%
Return of the market at the end of year=25%
Return of the market at the start of year=17%

Beta = (15-10)/(25-17)
Beta of stock = 0.625

A lower Beta Represents (less than 1) that if the stock market index moves by 1% then the stock will move by less than 1% and vice versa.

Example:
Suppose Beta of a stock is 0.625, if stock market index goes down by 1% then the stock will go down by 0.625% and vice versa.

SO A HIGHER BETA STOCK WILL MOVE/CHANGE RELATIVELY MORE THAN LOWER BETA STOCK.

AMD WILL RELATIVELY MORE THAN LOWER BETA SOCK- TARGET.