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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index

A stock has a beta of 1.5 with the market index. Which statement best describes the nature of the risk measured by beta and the expected stock movement?

Beta measures systematic, market-related risk. A beta of 1.5 means the stock is expected to move 1.5% for every 1% move in the index, making it more volatile than the market. Unsystematic risk is stock specific and is not captured by beta.

  1. ABeta measures unsystematic risk; the stock should rise 1.5% when the index rises 1%
  2. BBeta measures systematic risk; the stock is expected to move 1.5% for every 1% move in the indexCorrect
  3. CBeta measures systematic risk; the stock is expected to move 0.67% for every 1% move in the index
  4. DBeta measures total risk; the stock moves opposite to the index

Explanation

Beta captures sensitivity to market movements, which is systematic (non-diversifiable) risk. A beta of 1.5 implies a 1.5% expected move for a 1% index move. Unsystematic risk is firm specific and is reduced by diversification, not measured by beta.

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