Answer :
The statement "A stock with a beta that is less than 1.0 or even a negative beta is called a defensive stock" is False.
Here's why:
1. Understanding Beta: Beta is a measure of a stock's volatility in relation to the overall market. A beta of less than 1.0 indicates that the stock is less volatile than the market, while a negative beta suggests an inverse relationship with the market.
2. Defensive Stocks: Defensive stocks are typically known for being less affected by economic downturns. They belong to industries like utilities, healthcare, and consumer staples, which tend to perform relatively well even when the economy is facing challenges.
3. Beta and Defensive Stocks: Defensive stocks usually have betas lower than 1.0, indicating their lower volatility compared to the market. However, having a beta less than 1.0 or a negative beta alone does not categorize a stock as defensive. It is the sector and the stock's performance during economic downturns that determine if it is a defensive stock.
4. Example: A utility company might have a beta of 0.7, which is less than 1.0, showing that it is less volatile than the market. This lower beta aligns with the characteristics of a defensive stock due to the stable nature of utility companies, but it's not solely based on the beta value.
In conclusion, while defensive stocks often have betas lower than 1.0, merely having a beta less than 1.0 or negative does not automatically classify a stock as defensive. The categorization as a defensive stock depends on other factors like sector performance during economic downturns.
Here's why:
1. Understanding Beta: Beta is a measure of a stock's volatility in relation to the overall market. A beta of less than 1.0 indicates that the stock is less volatile than the market, while a negative beta suggests an inverse relationship with the market.
2. Defensive Stocks: Defensive stocks are typically known for being less affected by economic downturns. They belong to industries like utilities, healthcare, and consumer staples, which tend to perform relatively well even when the economy is facing challenges.
3. Beta and Defensive Stocks: Defensive stocks usually have betas lower than 1.0, indicating their lower volatility compared to the market. However, having a beta less than 1.0 or a negative beta alone does not categorize a stock as defensive. It is the sector and the stock's performance during economic downturns that determine if it is a defensive stock.
4. Example: A utility company might have a beta of 0.7, which is less than 1.0, showing that it is less volatile than the market. This lower beta aligns with the characteristics of a defensive stock due to the stable nature of utility companies, but it's not solely based on the beta value.
In conclusion, while defensive stocks often have betas lower than 1.0, merely having a beta less than 1.0 or negative does not automatically classify a stock as defensive. The categorization as a defensive stock depends on other factors like sector performance during economic downturns.
