Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

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BlackTom AI · Accepted Answer

To understand the question, we start by clarifying what each term refers to in asset risk analysis.
Option 1: Squared deviation. This measures dispersion around the mean for a single variable, but it does not relate the asset's risk to the market or to an average asset. It captures total variability in isolation rather than systematic risk relative to a benchmark.
Option 2: Beta. Beta is specifically defined as the sensitivity of an asset's returns to the returns of the overall market. It expresses how much systematic (market-related) risk the asset carries compared with an average risky asset (the market). Thus, it directly measures systematic risk relative to the market benchmark.
Option 3: Standard deviation. While standard deviation assesses total risk or volatility of the asset itself, it does not separate systematic (market-driven) risk from idiosyncratic risk, and it does not express the asset’s risk relative to an average asset or the market.
Option 4: Mean. The mean (average return) tells us about expected return, not about risk or how much of that risk is systematic versus unsystematic. Therefore it is not a measure of systematic risk relative to an average asset.
Option 5: Variance. Variance is the squared standard deviation and likewise reflects total variability of returns without isolating the portion attributable to market movements. It does not quantify systematic risk relative to an average piece of risk.
In summary, options that focus on dispersion or total risk (squared deviation, standard deviation, variance) fail to directly quantify the asset’s systematic risk relative to the market, whereas beta is designed exactly for that comparison by capturing market-related sensitivity.

FNBSLW 344-23 Chapter 11 Practice Quiz (not graded)

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

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