What does a beta of 2 signify in the context of stock volatility?

What does a beta of 2 signify in the context of stock volatility?

• A. The stock price is stable compared to the market
• B. The stock price increases 20% when the market increases 10%
• C. The stock price decreases when the market increases
• D. The stock price is twice as unpredictable as the market

Answer: (B)

A beta of 2 indicates that the stock is expected to move twice as much as the market does in response to market movements. Specifically, when the market increases by 10%, a stock with a beta of 2 would be expected to increase by approximately 20%. This relationship illustrates the stock's volatility relative to the overall market: a beta higher than 1 suggests greater sensitivity to market movements, making the stock riskier. Therefore, option B accurately reflects the behavior of a stock with a beta of 2, as it demonstrates a direct proportionality in price changes in response to market fluctuations. In the context of the other choices, option A implies stability, which is contrary to a beta of 2, as it signifies higher risk. Option C misinterprets what a beta of 2 represents, as it does not suggest that the stock price would decrease when the market rises; instead, it denotes an amplified increase. Option D also incorrectly frames the concept of unpredictability, as beta is about volatility in relation to market movements, not just unpredictability in general.

A beta of 2 indicates that the stock is expected to move twice as much as the market does in response to market movements. Specifically, when the market increases by 10%, a stock with a beta of 2 would be expected to increase by approximately 20%. This relationship illustrates the stock's volatility relative to the overall market: a beta higher than 1 suggests greater sensitivity to market movements, making the stock riskier. Therefore, option B accurately reflects the behavior of a stock with a beta of 2, as it demonstrates a direct proportionality in price changes in response to market fluctuations.

In the context of the other choices, option A implies stability, which is contrary to a beta of 2, as it signifies higher risk. Option C misinterprets what a beta of 2 represents, as it does not suggest that the stock price would decrease when the market rises; instead, it denotes an amplified increase. Option D also incorrectly frames the concept of unpredictability, as beta is about volatility in relation to market movements, not just unpredictability in general.