Question

Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are "fair-weather friends." When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?

a) Trendy Tech Inc. - Highest Beta
b) Oily Oil Inc. - Lowest Beta
c) Conglomerated Conglomerate Inc. - Beta closest to 1
d) None of the above

Answer 1

Trendy Tech Inc. likely has the highest beta because of investor behavior that increases its volatility. Oily Oil Inc. has a lower but not necessarily the lowest beta, as it's influenced by volatile oil prices. Conglomerated Conglomerate Inc. likely has a beta closest to 1 due to its diverse holdings mirroring the market.

Step-by-step explanation:

Beta is a measure of a stock's volatility in relation to the overall market. A high beta implies that the stock's price is more volatile than the market, whereas a low beta indicates that the stock is less volatile and more stable compared to the market. In the given scenario, Trendy Tech Inc. likely has the highest beta given its investors' tendencies to buy in a rising market and sell in a declining market, showing high volatility. Oily Oil Inc. would have a lower beta than Trendy Tech since its stock price moves primarily in response to oil prices, not market fluctuations. However, it may not have the lowest beta, as oil prices can be quite volatile. Lastly, Conglomerated Conglomerate Inc., with its diversified holdings, is likely to have the beta closest to 1, showing a performance similar to the market average due to its diversification.