The greater the beta, the ………………….. of the security involved.
A. greater the unavoidable risk
B. greater the avoidable risk
C. less the unavoidable risk
D. less the avoidable risk
Answer Explanation for Question: The greater the beta, the of the security involved.
The beta factor measures an investment’s volatility, or systematic risk, in relation to the market overall. A capital asset pricing model (CAPM) uses beta to describe the relationship between systematic risk and expected return on assets (usually stocks). It is widely used as a method for valuing risky securities and estimating the expected returns of assets, taking into account both the risk of the assets and the cost of capital.
The beta of a security greater than 1.0 indicates that its price is theoretically more volatile than the market. A stock with a beta of 1.2, for example, is assumed to be 20% more volatile than the market. Thus, adding this stock to a portfolio will increase portfolio risk, but may also increase the portfolio’s expected return.
Beta values less than 1.0 indicate that the security is less volatile than the market. If this stock is included in a portfolio, it makes it less risky than if it were not included. The beta measurement is unable to detect unsystematic risk in stocks with a beta of 1.0. A stock with a beta of 1.0 is strongly correlated with the market.