What does beta indicate about a stock, and what does a beta greater than 1 imply?

What does beta indicate about a stock, and what does a beta greater than 1 imply?

• A. Beta measures dividend yield; beta >1 means higher yield.
• B. Beta measures sensitivity to market movements; a beta >1 indicates higher volatility.
• C. Beta measures book value; beta >1 means higher book value.
• D. Beta measures tax impact; beta >1 means higher taxes.

Answer: (B)

Beta shows how a stock tends to move when the overall market moves. It measures sensitivity to market movements, so a beta of 1 means the stock generally moves with the market. A beta greater than 1 indicates the stock is more volatile than the market, swinging more in response to market changes. For instance, with a beta of 1.2, a 5% market increase might push the stock up roughly 6%, and a 5% market drop might push it down about 6%. This reflects higher systematic risk, not changes in dividends, book value, or taxes.

Beta shows how a stock tends to move when the overall market moves. It measures sensitivity to market movements, so a beta of 1 means the stock generally moves with the market. A beta greater than 1 indicates the stock is more volatile than the market, swinging more in response to market changes. For instance, with a beta of 1.2, a 5% market increase might push the stock up roughly 6%, and a 5% market drop might push it down about 6%. This reflects higher systematic risk, not changes in dividends, book value, or taxes.