In the context of finance, the term 'beta' refers to
Athe process of simultaneous buying and selling of an asset from different platforms
Ban investment strategy of a portfolio manager to balance risk versus reward
Ca type of systemic risk that arises where perfect hedging is not possible
Da numeric value that measures the fluctuations of a stock to changes in the overall stock market
Answer & Solution
Correct answer: D. a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Answer: D. In finance, 'beta' refers to a numeric value measuring fluctuations of a stock relative to the overall stock market.
In the Capital Asset Pricing Model (CAPM):
- Beta = covariance(stock return, market return) / variance(market return)
A stock with beta = 1 moves in line with the market.
A stock with beta > 1 is MORE VOLATILE than the market (aggressive). E.g., beta 1.5 means stock typically moves 1.5% for each 1% market move.
A stock with beta < 1 is LESS VOLATILE than the market (defensive). E.g., beta 0.5 means stock moves 0.5% for each 1% market move.
A stock with negative beta moves opposite to the market.
Beta is a measure of SYSTEMATIC RISK (market-related risk that cannot be diversified away). Investors use beta to construct portfolios with desired risk profiles.
Distractors fail:
(A) Describes ARBITRAGE.
(B) Describes ASSET ALLOCATION strategy.
(C) Describes BASIS RISK or hedging imperfection.
Source: NCERT Class 12 Business Studies / CFA fundamentals of investment / Hull's Options, Futures and Other Derivatives.
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