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      Question

      In the Capital Asset Pricing Model (CAPM), the beta (β)

      of a security measures its:
      A Total risk (standard deviation). Correct Answer Incorrect Answer
      B Diversifiable (unsystematic) risk. Correct Answer Incorrect Answer
      C Non-diversifiable (systematic) risk relative to the market. Correct Answer Incorrect Answer
      D Expected return. Correct Answer Incorrect Answer
      E Idiosyncratic variance. Correct Answer Incorrect Answer

      Solution

      Beta (β) measures the sensitivity of a security's returns to movements in the overall market portfolio. It quantifies the systematic risk—the portion of risk that cannot be eliminated through diversification. The CAPM formula is: E(Ri) = Rf + βi (E(Rm) - Rf).

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