A stock with a beta of 1 is expected to have returns that are

• A. More volatile than the market
• B. Less volatile than the market
• C. About the same volatility as the market
• D. Unrelated to the market

Answer: (C)

Beta shows how a stock’s returns respond to moves in the overall market. A beta of 1 means the stock tends to move in step with the market, so its return volatility is about the same as the market’s. In other words, when the market moves, this stock’s price tends to swing by a similar percentage. The distinction is that beta captures market-related (systematic) risk; a stock can still have different total volatility if it has additional, company-specific factors. If beta were greater than 1, the stock would be more volatile than the market; if less than 1, less volatile; and if near 0, it would move little with the market.