NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A security's returns are plotted against the returns of a broad market index and a regression line is fitted. Which statistic obtained from this line measures the security's sensitivity to market movements?
The slope of the regression line of security returns against market returns is the beta. It measures how sensitive the security's return is to market movements, whereas the intercept is alpha, which captures return independent of the market.
- ASlope of the line (beta)Correct
- BIntercept of the line (alpha)
- CStandard error of the estimate
- DCorrelation between the two return series
Explanation
In the characteristic line, the slope is beta and shows how much the security's return changes for a unit change in market return. The intercept (alpha) measures return unrelated to the market. Correlation shows the strength of the linear relationship, not the sensitivity.
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