What does Beta measure?

What does Beta measure?

• A. Debt level
• B. Growth rate
• C. Relative volatility to the market
• D. Dividend payout

Answer: (C)

Beta measures how much a security’s returns move in relation to the overall market. It shows relative volatility to the market, capturing the portion of risk that cannot be diversified away (systematic risk). A Beta of 1 means the security tends to move with the market; a Beta greater than 1 indicates higher sensitivity and larger swings than the market; a Beta less than 1 indicates smaller swings. In practice, Beta is used in CAPM to estimate the expected return: the security’s risk premium is Beta times the market premium. The calculation is conceptually Cov(Ri, Rm) divided by Var(Rm). This concept is distinct from debt level, growth rate, or dividend payout, which relate to leverage, growth, and payout policy rather than how the asset co-moves with the market.

Beta measures how much a security’s returns move in relation to the overall market. It shows relative volatility to the market, capturing the portion of risk that cannot be diversified away (systematic risk). A Beta of 1 means the security tends to move with the market; a Beta greater than 1 indicates higher sensitivity and larger swings than the market; a Beta less than 1 indicates smaller swings. In practice, Beta is used in CAPM to estimate the expected return: the security’s risk premium is Beta times the market premium. The calculation is conceptually Cov(Ri, Rm) divided by Var(Rm). This concept is distinct from debt level, growth rate, or dividend payout, which relate to leverage, growth, and payout policy rather than how the asset co-moves with the market.