Can a stock that is more volatile than the market have a negative beta?

• A. No, beta cannot be negative
• B. Only for micro-cap stocks
• C. Only if the company has negative earnings
• D. Yes, if it correlates inversely to the market

Answer: (D)

Beta measures how a stock’s returns move with the market, not how big its swings are on their own. It can be negative when the stock tends to move opposite to the market. Since beta = Cov(stock, market) / Var(market), a negative correlation makes Cov negative, and thus beta negative, even if the stock is more volatile than the market. So a stock can be more volatile yet have a negative beta if its returns tend to invert relative to market moves. The key idea is that direction and sensitivity to market moves determine beta, not just absolute volatility; earnings or company size don’t fix beta, and negative beta isn’t limited to any particular group of stocks.