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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory

In the Capital Asset Pricing Model, the beta of a security measures which of the following?

Beta measures a security's sensitivity to movements in the market portfolio, which is its systematic or non-diversifiable risk. It does not capture total risk, which is measured by standard deviation, nor does it directly show the excess return earned.

  1. AIts total risk including diversifiable risk
  2. BIts sensitivity to movements in the market portfolioCorrect
  3. CIts expected return above the risk-free rate
  4. DIts standard deviation relative to its own mean

Explanation

Beta measures systematic risk, i.e. how much a security's returns move with the market portfolio. Total risk is measured by standard deviation, so the option mentioning total risk is wrong. Excess return is a different quantity.

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