What is beta in financial terms?

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BlackTom AI · Accepted Answer

Question: What is beta in financial terms?

Option 1: 'the beginning of time (hint = not this one!)' This is clearly a distractor with no relation to financial concepts of risk or asset pricing. It doesn’t describe any measurable attribute of an asset.

Option 2: 'the market premium' The market premium (often called the equity risk premium) represents the extra return investors require for bearing market risk, not the sensitivity of an asset’s returns to the market. Beta is not the market premium itself.

Option 3: 'a firm’s expected return' While beta is a factor used in models to estimate expected return, beta by itself is not the expected return. It is a measure of how much an asset’s returns move with the market, whereas expected return combines beta with other parameters like the risk-free rate and risk premia.

Option 4: 'the amount of systematic risk in an asset' This option correctly identifies beta as a measure of systematic (market) risk. Beta quantifies how much an asset’s returns tend to move in response to overall market movements, reflecting sensitivity to market risk rather than idiosyncratic risk. A higher beta indicates greater exposure to systematic risk, while a beta of 1 implies moves in line with the market, and a beta less than 1 indicates lower sensitivity.

MSB-250-300-002 Topic 8 Quiz

What is beta in financial terms?

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