Beta
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the
market as a whole. Beta represents the tendency of a security’s returns to respond to swings in the market.
A beta of 1 indicates that the security’s price moves with the market. A beta of less than 1 means
that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that
the security’s price is theoretically more volatile than the market.
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
1.AV Investments has a beta of 1.1, and BDA Investments has a beta of 1.3. It is true to say that:
a) BDA Investments is expected to be more volatile than AV Investments.
b) both funds will always perform better than the market.
c) both funds are expected to have an inferior performance when compared with the
market.
d) AV Investments will always have lower volatility than BDA Investments.
A)
A better of 1 shows that the investment will move directly in correlation with the market, a beta of negative 1 shows the investment will move in the exact opposite way to the market. A beta of higher than 1 shows that the investment will move in the same way but more extremely than the market. So an investment with a higher beta shows a larger volatility as the movements will be more extreme than the market.
2. In respect of the Capital Asset Pricing Model:
a) a portfolio with a beta of more than one will be expected to underperform the market.
b) a portfolio’s beta is not an indicator of the expected return.
c) a portfolio with a beta of one will be expected to return the same as the market.
d) a portfolio with a beta of less than one will be expected to outperform the market.
C)
By definition, the market has a beta of 1, and the beta of an individual security reflects the extent to which the security’s return moves up or down with the market.
- Further Study Text: Pages 141 - 142