The stock of eBay, Inc. (EBAY) currently has a beta of 1.67. Based on this, which of the following statements are necessarily true?
I. If the market is up 5%, an investor can expect the returns on eBay to increase by 1.67 times this amount, or 8.35%.
II. eBay would be a particularly good investment for an investor with a short investment horizon.
III. The returns on eBay are more volatile than the returns on the market in general.
IV. eBay has more unsystematic risk than the market in general.
Explanation
Answer: C - Only Selections I and III are necessarily true. eBay’s beta of 1.67 means that if the market is up 5%, an investor can expect the returns on eBay to increase by 1.67 times this amount, or 8.35%, and since eBay’s beta is greater than 1.0, we can say that the stock’s returns are more volatile than the returns on the market in general. Although eBay may have more unsystematic risk than the market in general, beta is not a measure of this. Beta is a measure of the market, or systematic, risk of the stock.
