Management Notes

Reference Notes for Management

Beta is the slope of

Beta is the slope of

A. the security market line.
B. the capital market line.
C. a characteristic line.
D. the CAPM.

The Correct Answer for the given question is option C. a characteristic line.

Answer Explanation for Question: Beta is the slope of

Beta is a measure of volatility (or systematic risk) of a security or portfolio compared to the market as a whole as part of the capital asset pricing model (CAPM). Investors can only gain an approximation of the amount of risk an individual stock will add to a diversified portfolio by analyzing beta data about it. It is necessary for the stock to be related to the benchmark being used in the calculation for beta to be meaningful.

According to statistics, beta is the slope of the line as a function of a regression. These data points represent the returns of each stock compared to those of the entire market. The beta factor describes the movement of a security’s returns in response to the market’s swings. Beta is calculated by dividing the product of the covariance between the security’s return and the market’s return by the variance of the market’s return over a specified period.

From a statistical perspective, the beta coefficient theory assumes that stock returns are normally distributed. The financial markets are, however, prone to large surprises. It is not always the case that returns are normally distributed. A stock’s beta might predict a stock’s future movement in some cases, but not all of the time.

An “aggressive” common stock would have a “beta”

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