Question

A high ‘Beta’ value for a stock indicates higher volatility of the stock. A stock with a beta value of 1 is just as risky as the stock market. What is correct for a stock, having negative beta value? 

A There is zero volatility of the stock Correct Answer Incorrect Answer
B There is no risk in investing in this stock Correct Answer Incorrect Answer
C There is very high risk, higher than the positive beta stock Correct Answer Incorrect Answer
D When the market falls, it will tend to rise Correct Answer Incorrect Answer
E All of the above Correct Answer Incorrect Answer

Solution

A negative beta coefficient does not necessarily mean absence of risk. A negative beta correlation would mean an investment that moves in the opposite direction from the stock market. When the market rises, then a negative-beta investment generally falls. When the market falls, then the negative-beta investment will tend to rise. This is generally true of gold stocks and gold bullion. Because gold is seen as a more secure store of value than currency, a market crash prompts investors to sell their stocks and either move into cash (for zero beta) or buy gold (for negative beta). An investment with zero beta means no volatility and no risk.

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