Of the options listed below, which is the best measure of systematic risk?

Question

BlackTom AI · Accepted Answer

To determine the best measure of systematic risk, we must evaluate what each option captures about risk exposure to market movements.
Option 1: The arithmetic average is a measure of central tendency, not risk. It summarizes the typical value of a dataset but tells us nothing about how returns move with the market or the variability around that mean.
Option 2: The standard deviation quantifies total or overall risk (the spread of returns) but does not separate risk arising from market-wide movements (systematic risk) from firm-specific risk. Diversified portfolios still face market-wide movements, which this metric alone cannot isolate.
Option 3: Beta is specifically designed to gauge systematic risk by measuring how sensitive a security's returns are to movements in the overall market. It captures the portion of risk that cannot be diversified away and thus is the appropriate measure of systematic risk.
Option 4: The geometric average pertains to compound growth over time rather than risk magnitude. It smooths returns and does not evaluate how returns co-move with the market, so it fails to assess systematic risk.
Option 5: The weighted average standard deviation is not a standard or widely accepted measure of risk in this context. It conflates variances in a way that does not yield a clear, widely used indicator of systematic risk.
Overall, only Beta directly quantifies the market-related (systematic) risk component, while the other options either describe central tendency, total risk, or nonstandard approaches that do not isolate market sensitivity.

BUSFIN 3220 AU2025 (2910) Exam 3 - Requires Respondus LockDown Browser

Of the options listed below, which is the best measure of systematic risk?

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