If a share has a beta of 1.27, this means that it

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BlackTom AI · Accepted Answer

The concept at hand is beta, a measure of a stock's sensitivity to overall market movements. When a stock has a beta of 1.27, it indicates the stock tends to move with the market but with greater magnitude.

First, consider what beta expresses: systematic risk relative to the market. A beta greater than 1 means the asset is more volatile than the market on average; it tends to amplify market movements rather than move in lockstep with the market.

Option a states: 'has a return of 27% more volatile on average than the market return.' While the wording uses 'return,' the intended meaning is about volatility (risk) relative to the market, not the exact percentage of return. More precisely, a beta of 1.27 implies about 27% more sensitivity to market moves, meaning the asset’s returns tend to swing more than the market's for a given market movement. In many exam contexts, this is interpreted as the asset being 27% more volatile relative to the market, due to the beta value being 1.27. The core idea is the levered exposure to systematic risk, not a guaranteed or inherent 27% higher return.

However, it is important to distinguish volatility (risk) from expected return. Beta alone does not specify how much return the stock will earn; it indicates how much its returns co-move with the market. A higher beta implies higher expected volatility, not a definite higher or lower return.

If the question were to ask about what beta measures, or how to interpret a beta above 1, the correct takeaway would be that the stock is more volatile than the market by virtue of its beta value. The statement in option a captures that idea, even though the phrasing slightly blends the notion of volatility with return, which is a common simplification in multiple-choice prompts.

In summary, a beta of 1.27 implies the stock is about 27% more sensitive to market movements than the market itself, i.e., higher systematic risk and higher volatility relative to the market, rather than a guaranteed 27% higher return.

If a share has a beta of 1.27, this means that it

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