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00aremoreriskythan theoverallmarket

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Unformatted text preview: easure of Risk Risk A measure of nondiversifiable risk Indicates how the price of a security responds to market forces Compares historical return of an investment to the market return (the S&P 500 Index) The beta for the market is 1.00 Stocks may have positive or negative betas. Nearly all are positive. Stocks with betas greater than 1.00 are more risky than the overall market. Stocks with betas less than 1.00 are less risky than the overall market. Figure 5.5 Graphical Derivation of Figure Beta for Securities C and D* Beta Monthly Holding-Period Returns of Barnes & Noble and the S&P 500 Index, December 2002 to November 2004 (The SCL for Barnes & Noble) Beta: A Popular Measure of Risk Risk Table 5.4 Selected Betas and Associated Interpretations Interpreting Beta Interpreting Higher stock betas should result in higher expected returns due to greater risk If the market is expected to increase 10%, a stock with a beta of 1.50 is expected to increase 15% If the market went down 8%, then a stock with a beta of 0.50 should only decrease by about 4% Beta values for specific stocks can be obtained from Value Line reports or online websites such as yahoo.com Interpreting Beta Interpreting Capital Asset Pricing Model (CAPM) (CAPM) Model that links the notions of risk and return Helps investors define the required return on an investment As beta increases, the required return for a given investment increases Capital Asset Pricing Model (CAPM) (cont’d) • U...
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