Question 23

A stock with a beta of 0.5 would be best to own if the market is experiencing a significant downturn.

A stock with a beta of 0.5 indicates that it is less volatile than the market. In a significant downturn, such stocks tend to decline less in value compared to the overall market, making them a safer investment option during turbulent times.

A) A stock with a beta of 0.5

This option is correct because a beta of 0.5 suggests that the stock is less sensitive to market movements, meaning it is likely to experience smaller declines during downturns. This characteristic makes it an ideal choice for investors looking to minimize risk when the market is unstable.

B) A stock with a beta of 1

A stock with a beta of 1 moves in line with the market, meaning its price will likely drop as much as the market does during a downturn. Therefore, it does not provide the defensive qualities that investors seek in a declining market.

C) A stock with a beta of 1.5

This choice is incorrect as a stock with a beta of 1.5 is more volatile than the market and would likely experience larger price drops during a downturn. Such stocks are generally riskier and may not be suitable for investors looking to protect their capital in adverse conditions.

D) A stock with a beta of 2

A stock with a beta of 2 is even more volatile, indicating that it would likely drop twice as much as the market during a downturn. This high level of risk makes it an unsuitable option for investors who wish to avoid significant losses in a declining market.

Conclusion

The best choice in a significant market downturn is a stock with a beta of 0.5, as it offers reduced volatility and potential losses compared to the market. Other options, with higher betas, expose investors to greater risk and potential declines, making them less favorable in such economic conditions. Thus, owning a stock with a lower beta is a strategic move for risk-averse investors during market declines.