Question 8.A.6: Would it be better to hold shares with a beta value of more ...

Financial Management for Decision Makers

Would it be better to hold shares with a beta value of more than 1.0 or less than 1.0 when stock market prices are generally

(a) rising
(b) falling?

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When stock market prices are rising, it is better to hold shares with a beta value of more than 1.0. Their returns are more responsive to market price changes and so when stock market prices are rising, their returns will be greater than for the market as a whole. As shares with a beta value of less than 1.0 are less responsive to market price changes, they will not benefit so much from a rise in market prices. When stock market prices are falling, however, the position is reversed. It is better to hold shares with a beta value of less than 1.0 as their returns are less responsive to falls in market prices.

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