You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?
$\begin{array}{cc}\text { Years }&\text { Market }&\text { Stock A } & \text { Stock B } \\1&0.03&0.16 & 0.05 \\2&0.03&0.20& 0.05 \\3&0.03&0.18 & 0.05 \\4&0.03& 0.25& 0.05 \\5&0.03&0.14 &0.05\end{array}$

Question

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. 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&0.03&0.16 & 0.05 \\2&0.03&0.20& 0.05 \\3&0.03&0.18 & 0.05 \\4&0.03& 0.25& 0.05 \\5&0.03&0.14 &0.05\end{array}

Quizplus · Accepted Answer

B's returns are independent of the market, hence its beta is zero. If you plot A's returns against those of the market, you see a negative slope, hence B's beta is negative. Therefore, d is the correct answer.

You Have the Following Data on (1) the Average Annual