What does a beta of 1.2 mean? If the market return increases by 15%, what impact

Question

What does a beta of 1.2 mean? If the market return increases by 15%, what impact would this change be expected to have on the asset’s return? If the market decreases by 8%?

Can an investment have a beta of zero? If so, what does this mean in terms of market risk? What is an example of a zero-beta asset?

Can an investment have a negative beta? What would a beta of -0.2 mean? If the market return increases by 10%, what impact would this change be expected to have on the asset’s return? If the market decreases by 10%? What is an example of a negative-beta asset?

Explanation / Answer

Beta is a measure of risk of the system. Beta varies with industry to industry.

Beta of 1.2 means the security price is more theoretically volatile than the market by 20%. it happens in case of aggressive industries.

If market increases by 15%, with beta 1.2 , the assets return would increase by 18% i.e. 15*1.2 =18%

If market decreases by 8% , with beta 1.2, assets return would decrease by 9.6% i.e 8×1.2 =9.6%

When beta is 0 it means that such investment is risk free ie., They are risk less investments like government Treasury bills,etc.

Beta = 0 can also be as a result of such combinations of investments with negative correlation.

When beta = -0.2 , ie., A negative beta value means the returns of the investments and market has inverse relation. When market goes up, investments go down and vice versa.

If market return increases by 10%, with beta = -0.2 the return of investment would fall by 2%

If market return decreases by 10% the investment would increase by 2%.

Gold is an example of negative beta asser

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