Certified Valuation Analyst (CVA) Practice Exam

How does volatility reflect in a company's beta coefficient?

1. A beta less than 1 indicates more volatility

2. A beta of 0 indicates no correlation to market movements

3. A beta greater than 1 shows less volatility

4. A negative beta indicates less volatility

The correct answer is: A beta of 0 indicates no correlation to market movements

A beta coefficient is a measure of a stock's risk in relation to the market as a whole. The beta value reflects how much the company's stock price is expected to move in relation to market movements. A beta of 0 indeed indicates that the stock has no correlation with market movements, meaning that it is independent of the volatility typically associated with the market. When a company's beta is 0, it implies that the stock is not expected to experience swings in price due to overall market changes. This can be beneficial for investors looking for stability during volatile market periods, as this stock may not reflect the market's ups and downs. In contrast, a beta less than 1 indicates the stock is less volatile compared to the market, meaning it generally moves less sharply with market changes, while a beta greater than 1 shows that the stock is more volatile, moving more dramatically with market changes. A negative beta means the stock moves in the opposite direction of the market, which is quite uncommon but suggests that in volatile times, this stock may actually perform well when the market performs poorly. Thus, a beta of 0 is a clear indication of no correlation, making that choice the most accurate in addressing how volatility reflects in a company's beta coefficient.