Beta: Understanding the Measure of Systematic Risk | CFA Level 1 Exam Prep

Understanding Beta

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Question

Which of the following statements about Beta is TRUE?

Answers

A. In the characteristic line, the termEResidualsequals the portion of the asset's returns that are correlated to the market portfolio's returns.

B. The calculation of Beta assumes that future variability will equal past variability.

C. Beta <1, ERstock>ERmarket.

D. Beta and standard deviation differ as risk measures in that beta measures only systematic risk, whereas standard deviation measures only unsystematic risk.

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Explanations

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A. B. C. D.

Standard deviation measures total risk. When Beta < 1, ERstock< ERmarket. The characteristic line is the equation for Beta. The error term, EResiduals, equals the portion of the asset's returns that areuncorrelatedto the market portfolio's returns, or unsystematic risk. This error term has an expected value of 0 and the standard deviation is called the residual standard error.

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