Consider the following average annual returns for Stocks A and B and the Market. Which of the possible answers best describes the historical betas for A and B?
$\begin{array}{cc}\text { Years }&\text { Market }& \text { Stock A }& \text { Stock B } \\1&-0.05 & 0.16&0.05 \\2&0.01 & 0.20 &0.05 \\3&-0.10 & 0.18&0.05 \\4&0.06 & 0.25 &0.05 \\5&0.06& 0.14&0.05 \end{array}$

Question

Consider the following average annual returns for Stocks A and B and the Market. Which of the possible answers best describes the historical betas for A and B?

\begin{array}{cc}\text { Years }&\text { Market }& \text { Stock A }& \text { Stock B } \\1&-0.05 & 0.16&0.05 \\2&0.01 & 0.20 &0.05 \\3&-0.10 & 0.18&0.05 \\4&0.06 & 0.25 &0.05 \\5&0.06& 0.14&0.05 \end{array}

Quizplus · Accepted Answer

First, note that B's beta must be zero, so either a or c must be correct. Second, note that A's returns are highest when the market's returns are negative and lowest when the market's returns are positive. This indicates that A's beta is negative. Thus, c must be correct.

Consider the Following Average Annual Returns for Stocks a and B