The beta of Southeast has been estimated to be 0.85. Which of the following stat

Question

The beta of Southeast has been estimated to be 0.85. Which of the following statements about Southeast is FALSE? a. If the market rises by 1%, Southeast would be expected to rise by 1.85%. b. If the market falls by 1%, Southeast would be expected to fall by 0.85%. c. The covariance between Southeast and the market divided by the variance of the market is equal to 0.85. d. The sign of the covariance between Southeast and the market is greater than zero. e. Southeast is considered to be less risky compared to the market.

Explanation / Answer

Solution:

c. The covariance between Southeast and the market divided by the variance of the market is equal to 0.85.

Reason: The beta coefficient is calculated by dividing the covariance of the stock return versus the market return by the variance of the market. So the above statement is False.

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