If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect this individual stock to:

Question 8 options:

a)

gain, but less than 10%

b)

lose, but less than 10%

c)

lose more than 10%

d)

gain more than 10%

The beta of a stock measures its sensitivity to market movements. A beta of 1 indicates that the stock tends to move in sync with the market. A beta below 1, such as 0.8, suggests that the stock is less volatile than the market. Here’s the expected behavior in this case:

Since the stock's beta is 0.8, and the market portfolio has dropped by 10%, we can calculate the expected percentage change in the stock's value as follows:

\[
\text{Expected change in stock} = \beta \times \text{Market change} = 0.8 \times (-10\%) = -8\%
\]

This indicates that the stock would be expected to **lose 8%**, which is less than the market's 10% drop.

### Correct Answer:
**b) lose, but less than 10%**

Would you like further details or have any questions?

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Here are some related questions to deepen understanding:

1. How would the expected return change if the beta were 1.2 instead of 0.8?
2. What does a beta of 0 signify for a stock's behavior relative to the market?
3. How would the answer change if the market increased by 10% instead of decreasing?
4. What is the significance of beta values greater than 1 in terms of risk?
5. How does beta impact a portfolio’s diversification strategy?

**Tip:** Beta values close to 1 indicate that a stock moves closely with the market, while values far from 1 suggest higher or lower volatility relative to the market.

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect this individual stock to:

Learn how to calculate the expected change in stock value using the beta coefficient. In this problem, we explore how a stock with a beta of 0.8 behaves when the market drops by 10%. The solution demonstrates the key formula and concepts of financial modeling and CAPM. Suitable for high school students in advanced economics or finance courses.

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