ACCA Financial Management (F9) Certification Practice Exam

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If a stock has a beta greater than 1, what does this indicate?

  1. Share is insensitive to market movements

  2. Share has average risk

  3. Share is sensitive to stock market changes

  4. Share has low volatility

The correct answer is: Share is sensitive to stock market changes

A beta greater than 1 indicates that the stock is more volatile than the market as a whole. Specifically, it suggests that when the market goes up or down, the stock's price will tend to move in the same direction but with a greater degree of change. For example, if the market increases by 10%, a stock with a beta of 1.5 might increase by 15%. Conversely, if the market drops by 10%, the same stock may drop by 15%. This heightened sensitivity to market movements means that investors can expect greater fluctuations in the stock's returns in comparison to the market average. Thus, a beta greater than 1 is indicative of a stock that is sensitive to stock market changes, which aligns with the correct choice.

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