Graphical derivation and interpreting beta You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical

Industries makes machine tools and other heavy equipment, the demand for which rises and falls closely with the overall state of the economy. The second stock, shown in Panel B, is Biotech Cures Corporation. Biotech Cures uses biotechnology to develop new pharmaceutical compounds to treat incurable diseases. Biotech's fortunes are driven largely by the success or failure of its scientists to discover new and effective drugs. Each data point on the graph shows the monthly return on the stock of interest and the monthly return on the overall stock market. The lines drawn through the data points represent the characteristic lines for each security.
a. Which stock do you think has a higher standard deviation? Why?
b. Which stock do you think has a higher beta? Why?
c. Which stock do you think is riskier? What does the answer to this question dependon?

Transcribed Image Text:

Return on Overall Market 20 Return on Cydical -30 -20 10 20 30 Industries 61020 -20 30 Return on Overall Market 50t . Panel A 20. 10 Return on Biotech -30 104..ng 20 30 Cures 30 50다 Panel B