Which statement about beta and dividends is correct?

Which statement about beta and dividends is correct?

• A. Dividend yields are already factored into Beta
• B. Beta only depends on debt
• C. Beta ignores dividend policy
• D. Beta equals dividend yield

Answer: (A)

Beta measures how much a stock’s returns move with the overall market. When you look at total returns—that is, price change plus dividends—the dividend payments are part of what you observe as the stock’s return. So the dividend yield is inherently included in the data used to estimate beta. In other words, in a total-return framework, dividend yields are already factored into beta, because they affect the observed returns that beta is calculated from. The other ideas don’t fit as well: beta isn’t simply determined by debt, since it reflects how the stock’s returns co-move with the market, not just leverage. While some talk about beta being unaffected by dividend policy, that’s a nuance depending on whether you use price-only versus total returns; the statement that dividend yields are already factored into beta captures the common practice of using total returns to estimate beta. And beta is not equal to the dividend yield, since beta measures market risk, not cash yield.

Beta measures how much a stock’s returns move with the overall market. When you look at total returns—that is, price change plus dividends—the dividend payments are part of what you observe as the stock’s return. So the dividend yield is inherently included in the data used to estimate beta. In other words, in a total-return framework, dividend yields are already factored into beta, because they affect the observed returns that beta is calculated from.

The other ideas don’t fit as well: beta isn’t simply determined by debt, since it reflects how the stock’s returns co-move with the market, not just leverage. While some talk about beta being unaffected by dividend policy, that’s a nuance depending on whether you use price-only versus total returns; the statement that dividend yields are already factored into beta captures the common practice of using total returns to estimate beta. And beta is not equal to the dividend yield, since beta measures market risk, not cash yield.