Certified Valuation Analyst (CVA) Practice Exam

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What does a beta of -0.8 for Left Hand Glove Company indicate?

The company is significantly more volatile than its industry
The company is slightly less volatile than its industry
The company has no correlation to market movements
The company faces high market risks

The correct answer is: The company is slightly less volatile than its industry

A beta of -0.8 indicates that the Left Hand Glove Company is slightly less volatile than its industry. Beta is a measure of a stock's volatility in relation to the overall market, with a beta of 1 representing market volatility. A beta less than 1 signifies that the stock is less volatile than the market, while a negative beta indicates an inverse relationship to market movements. In this case, a beta of -0.8 suggests that the company's stock price tends to move in the opposite direction to the market. For instance, if the market were to rise, the company’s stock might be expected to decline modestly, reflecting its negative correlation with market trends. Additionally, being slightly less volatile than its industry suggests that while the company does experience fluctuations, it tends to do so to a lesser extent compared to its industry peers. This nuanced understanding of beta helps investors assess risk and make informed decisions based on volatility expectations.