Which one of the following statements concerning beta is correct?
A)The beta assigned to the overall market is zero.
B)A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3.
C)A stock with a beta of .5 has 50 percent more risk than the overall market.
D)Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models.
E)The higher the beta, the higher the discount rate used for the dividend discount model.

Question

Quizplus · Accepted Answer

Beta is used to measure the volatility of a stock relative to the overall market. The higher the beta, the higher the discount rate used for the dividend discount model. This is because higher beta stocks are considered to have higher risk and therefore require a higher return to compensate for that risk.

Which One of the Following Statements Concerning Beta Is Correct